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Handbook of Exchange Rates by Lucio Sarno, Ian Marsh, Jessica James

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5.5 Prospects for the Future

The future of exchange rate regimes may be influenced by two distinct types of events. In the context of the current system, or rather “nonsystem” where exchange rate regimes are virtually at the discretion of individual governments, any regime from a pure float to a hard fix is possible—as are regional currencies and dollarization. In light of the experience of the past 40 years, competition among currencies is likely to dictate the choice of international money. However, it is also possible that there might be a concerted move to a different global system—a more managed international monetary system in which the choices of individual countries were constrained and in which the “rules of the game” were made more stringent. Past examples of the latter include, of course, the gold standard and the Bretton Woods system of fixed but adjustable parities, but neither seems likely to be reinstated. Instead, any new system is likely to allow countries to retain considerable flexibility to hit domestic objectives. This is discussed further below, and modifications to the current system are suggested.

5.5.1 The Current System

For reasons that have already been discussed, short of a concerted reform, it does not seem likely that the world will converge to a single system, in which all countries let their currencies float freely, despite the arguments of the proponents of such a regime accompanied by inflation targeting (Rose, 2006). The advantages of such a regime ...

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