International Monetary Policies, Interdependence, and Debt

Abstract

breaking down in the late 1960s and early 1970s, was believed that a system of flexible exchange rates would afford member countries a higher degree of monetary independence. Freed from the balance-of-payments (read balance-of-trade) equilibrium constraint, monetary policy could have been directed to the achievement of domestic objectives, most notably the desired degree of internal price stability, independent of that of the rest of the world. Greater autonomy in national monetary policies and less interdependence in inflation (and perhaps output) rates were expected to be the main benefits of more flexible exchange rates. Moving away from fixed exchange rates would not only have reduced the "common currency standard" characteristics of the Bretton Woods system and the strong economic interdependence implicit in it, but would also have lessened the policy conflicts arising from the perceived asymmetry in the sharing of adjustment burdens between balance of payments deficit-prone and surplus-prone countries. It would have, in addition, reduced the "exorbitant privilege" retained by the reserve issuing country (the United States), whose degree of monetary autonomy was unparalleled within the system. It was also thought that the preservation of the liberal trade system developed in the post-World War II era would be made easier with a more automatic balance-of-trade adjustment mechanism in place.