Handbook of Exchange Rates

5.3 Performance of the Laisser-Faire Exchange Rate System, 1973–2010

The “nonsystem” inherited some of the perceived defects of the Bretton Woods system—no control over international liquidity and asymmetry in the need for adjustment of deficit and surplus countries—supplemented with much greater volatility of exchange rates and at times, large misalignments. At the same time, it allowed much more freedom in the use of monetary policies and no longer obliged countries to defend parities. The flexibility of exchange rates, which facilitated balance of payments adjustment, and the relative absence of rules of the game made the regime relatively robust. In principle, the IMF's Guidelines to Floating ruled out manipulation of exchange rates (for instance, to achieve competitive advantage), and the IMF's surveillance over exchange rate policies existed to rule out negative spillovers. In practice, however, no country was sanctioned for manipulation, and the IMF's advice mostly went unheeded by the major countries, which did not need to access IMF financing.

Assessment of whether the current regime is better or worse than the Bretton Woods system requires addressing two basic issues. First, has the greater flexibility (and consequent volatility) of exchange rates contributed to better balance of payments adjustment (and macroeconomic performance generally)? Second, would the alternative of maintaining fixity of exchange rates be feasible in a context of increasing global financial integration? ...