Currencies Considered

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Article: "Currencies Considered"
Author: TAMIM BAYOUMI; TAMIM BAYOUMI is a visiting professor at King’s College London.
F&D Magazine, September 2024.
Reviewed book: Floating Exchange Rates at Fifty, Douglas A. Irwin and Maurice Obstfeld, eds., PIIE Press, Washington, DC, 2024, 384 pp., $25.

The book comprises 28 essays and an introduction by Maury Obstfeld and Doug Irwin examining the switch to floating exchange rates in 1973.
Essays present diverse conclusions:
- Anne Krueger and Fred Bergsten view floating rates relatively positively, seeing them as better than the alternatives.
- Robert Aliber attributes serial financial instability to the move to floating rates.
Political economy constraints to improving the international monetary system are a recurring theme.

The move to floating rates was characterized as "a leap in the dark" with outcomes differing from expectations.
Exchange rates did not adjust smoothly but "jumped around" because financial transactions have dominated over trade-related transactions (point attributed to Hyun Song Shin).
The end of fixed dollar parities enhanced the role of the dollar, reflecting the "unparalleled breadth and depth of US financial markets."
Efforts to stabilize exchange rates among European countries after the demise of dollar parities contributed to monetary cooperation that culminated in the euro (point attributed to Philip Lane).
The floating-rate system, expected by many to be temporary, has persisted.

A new system emerged in advanced economies comprising:
- inflation targeting,
- free-floating exchange rates,
- deep and highly integrated capital markets anchored on the dollar.
This integration and dependence on US markets created vulnerabilities manifested during the 2008 North Atlantic financial crisis:
- The Federal Reserve arranged swap agreements with other major central banks and effectively acted as lender of last resort for the advanced world.

Emerging markets experienced a different and "significantly rougher" evolution than advanced economies.
More successful emerging markets adopted inflation targeting and floating rates but face structural vulnerabilities:
- thinner domestic capital markets,
- lack of access to swap lines,
- greater vulnerability to financial shocks.
These vulnerabilities explain continued use of intervention and capital controls in many emerging markets.
The last major regional bloc maintaining dollar pegs is Middle Eastern oil producers, attributed to shallow capital markets and geopolitical considerations (point attributed to Adnan Mazarei).

The final section assesses the prospects of the dollar, the euro, and the renminbi.
Relative unanimity among contributors that "the dollar will remain the dominant currency for at least the next decade," because neither the euro area nor China currently offers the financial depth needed to replace it.

The reviewer characterizes the volume as "a treasure trove of information and insight."
The book's breadth, depth, and clarity are attributed to the quality of the editors and the Peterson Institute for International Economics network.
Reading the collection is described as informative and educational: "I learned an awful lot from reading it and am sure you will too."

Source: IMF F&D Magazine, "Currencies Considered," TAMIM BAYOUMI, September 2024.

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