Int’l Monetary Crisis - II
Attempts to Return to Fixed Rates
Readings
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BusinessWeek articles on dollar crisis
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“New Eurocurrency Era”
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“More than a supersnake”
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R.A.Mundell, “Gold Would Serve”
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Wall
Street Journal articles on Baker’s
Plan for use of gold in price index
EMS: Reasons
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Extreme instability of exchange rate
markets undercut stable trade & investment
– from Common
Market to EU to ecu
– Europe aiming at
monetary union in 1993
– monetary union Þ political union
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EMS helps impose discipline w/in co’s
– Triffin:”main
purpose of the agreement is to promote domestic policies combating inflation”
– EMS would put
pressure on co’s w/less control of labor
How the EMS works
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EMS is extension of the “snake” that
linked exchange rates w/in bands
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Bands = ± 2.25%
– fluctuations
within ok
– fluctuations
that exceed this would call for govt intervention, either
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directly inforeign exchange markets
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or, indirectly thru Keynesian methods
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Central Bank collaboration Þ large pool
EMS: Results
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For 1979-90, inflation WAS reduced
(but this included Reagan’s depression
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Differentials btwn Europeans
countries dropped as well
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But: ‘79 - ’87 $ 11 realignments of rates due to continuing internal problems
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EMS did NOT provide enough clout to
end internal problems
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Crises like that in 1992 when UK
withdrew & bands were widened to 15%
Gold Bugs & Back Doors
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Search for alternative to dirty
floats & fixed rates brought revival of gold bugs
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Robert Mundell revives French arguments
from ‘60s for revaluing gold + coin + surveillance + supply side attacks on
labor
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Treas.Sec.Baker tried sneaking gold
in back door thru “commodity price index”
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Index would be used to inform OECD
politics & their coordination
Objections to Gold
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Commodity prices much more volatile
than all prices, thus bad predictor
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Economists want policy free of any
commodity, commodities ¯ role in prices
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Some say unemployment, not inflation,
is the problem, but this has been minority view
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Upshot: Gold has remained
marginalized
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