Letters to the editor
| Pages | 2-3 |
Page 2
Kenneth S. Rogoff casts "a vote against grandiose schemes" of international economic policy coordination (March 2003). He specifies the coordination problem in such a narrow and virtually irrelevant manner, however, as to preordain the answer and trivialize it. Advocates of coordination see a very different problem that we believe can be addressed by a modest approach that Rogoff ignores. He defines "international economic policy coordination" as "cooperation among the world's major central banks . . . to arbitrate and coordinate interest rate policy." He rightly notes that advocates of such schemes seek primarily to limit exchange rate volatility and, rightly again, that there is little evidence that volatility has a significant impact on trade (or, one might add, on anything else). Noting, too, that monetary policy needs to retain its focus on price stability and that such cooperation among central banks could generate costs of its own, he therefore rejects this particular concept of international coordination. He correctly concludes that it is a non-answer to a non-problem.
There is another property of the present exchange rate regime, however, that represents an extremely serious problem for both individual countries and the global economy: prolonged currency misalignments that stray far from sustainable long-run equilibrium levels for extended periods. The increasingly obvious proliferation of such disequlibria, especially for the dollar and other major currencies, was the main reason the original postwar system of adjustable pegs collapsed. Floating rates were supposed to obviate the problem. But misalignments have turned out to be at least as pronounced under the regime of managed flexibility in place for over 30 years. By any calculation, the dollar became much more overvalued in the mid-1980s than it ever was under the Bretton Woods system. It has been substantially overvalued again for the last few years. The results have included large, rapidly increasing trade and current account imbalances that distorted entire sectors, especially trade-dependent manufacturing; protectionist pressures that threatened the stability of the trading system; and constant risk of sharp reversals in the currency markets themselves that could generate "hard landings." The misalignments became so costly in the mid-1980s that the major industrial countries adopted the Plaza Agreement to correct them. Market errors have turned out to be even...
To continue reading
Request your trial