Volume VIII – Number 2
Paul Wonnacott
Abstract: As trade has increased, international tensions over the balance of payments and rate of exchange has increased along with it. The old order of fixed or pegged exchange rates does not calm these tensions and is not beneficial for domestic economies. However, the fact that pegged exchange rates no longer work does not mean that we should transition to a fully adjustable system of exchange rates. Instead, there is a middle road that must be considered. I argue that countries should have the ability to adjust the rate of exchange, though only to a limited degree. This article will outline how a system of flexible exchange rates, with the modification of limited domestic controls, will produce a more stable international financial system. Allowing countries to slow the rate of exchange but not export their business cycles to other countries would prevent the instability and potential conflict that comes with fully flexible exchange rates. Capital and investment should flow freely around the world, but it must be in a relaxed manner. To do otherwise is to invite tension and conflict. This article will summarize the risk that comes with both fixed exchange rates as well as fully flexible rates. By challenging both sides of the exchange rate debate, this article shows why a middle road is best for the growing international system.
Key Terms: Exchange Rate, International Monetary Fund, International Finance, Investment, World Bank
