The Fallacy of the Revised Bretton Woods Hypothesis

Abstract

Dooley et al. (2003) have argued that today’s international financial system has structural similarities with the earlier Bretton Woods (1946 – 71) arrangements and is stable. This paper argues that the comparison is misplaced and ignores fundamental microeconomic differences, and that today’s system is also vulnerable to a crash. Eichengreen (2004) and Goldstein and Lardy (2005) have also argued that the system is unsustainable. However, their focus is the sustainability of financing to cover the U.S. trade deficit, whereas the current paper focuses on inadequacies on the system’s demand side. The paper concludes with suggestions for a global system of managed exchange rates that should replace the current system – hopefully, before it crashes.