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Abbravation: International Economics and Economic Policy

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A worldwide system of reference rates

Authors: John Williamson,

Publish Date: 2006/11/11
Volume: 3, Issue:3-4, Pages: 341-352
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This paper assumes that the major industrial countries (and probably most other major countries) will continue to employ inflation targeting and allow their exchange rates to float, in the sense of accepting no obligation to hold the rate at any particular level. However, it points out that floating may be interpreted in three different ways: as free floating, as permitting ad hoc intervention (with no rules, except possibly that there should be no “manipulation” of the exchange rate), and as managed floating, with the rules and parameters publicly announced. The latter can in turn be accomplished either by prescribing rules relating to changes or levels in the exchange rate. The paper argues in favor of a system of managed floating in which the rules prohibit intervention that would push the exchange rate away from an internationally agreed reference rate. It discusses the problems that would arise in calculating and agreeing a set of reference rates. While these would undoubtedly be serious, the prize is a system that would allow—but not compel—countries to attempt to limit the misalignments of their currency, and that would give the IMF a basis for effective surveillance.A paper presented at a workshop organized by the Bank of Greece and the Oesterreichische Nationalbank on 24-25 February 2006 in Vienna and to be published in International Economics and Economic Policy. The author is indebted to Edwin Truman, Richard Cooper, Randy Henning, workshop participants, and those at a seminar at the University of Warwick for comments on previous drafts.



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