Speech

Washington, DC
November 15, 2007

As Prepared for Delivery

Welcome to the conference. I'm very pleased that you could join us today. Exchange rates are on everyone's mind at the moment, and this conference is timely. In recent weeks we have seen a significant further depreciation of the U.S. dollar against the euro. This is of concern to many people: to citizens, businessmen, and policy makers. Last week, Jean Claude Trichet said that we should avoid "brutal" moves in exchange rates.

Abrupt exchange rate movements are not the only problem that the global economy faces, but they are one symptom of problems. We in the Fund believe that the direction of movement of the dollar is right, and is helping to bring the dollar more in line with its warranted level, based on medium-run fundamentals—including the still sizable projected U.S. current account deficit. Many would also argue that an appreciation of the Chinese renminbi is also needed.

But nobody would seriously argue that exchange rate adjustments are the whole solution to the problem of global economic imbalances. The problem goes deeper and cooperative actions in many areas are needed. That is why we need to continue with cooperation along the lines laid out in the Multilateral Consultation that the Fund has organized in the last year and a half.

This conference is very important, because if can help us gain a better understanding of exchange rate issues, and help us to arrive at better solutions to these and other problems. I see a number of respects in which the papers that will be presented today and tomorrow can help advance our knowledge. Let me single out three themes.

The first is the implications of increasing interdependence. The paper on "Macroeconomic Independence and the International Role of the Dollar" that you will discuss this morning makes a convincing argument that major countries' monetary and exchange rate policies matter not just for them and their trading partners but also for other countries that value their trade in that currency. Obviously this is especially important for the dollar and the euro. This kind of interdependence is indicative of a more general interdependence produced by financial globalization. This is very significant for a multilateral institution like the Fund, where we believe that multilateralism matters, and questions have to be addressed on a multilateral basis.

The second theme, which you will discuss tomorrow, is how exchange rates are determined. This is also going to be very important for the Fund. You all know, I am sure, that the Fund clarified earlier this year the central role of surveillance of exchange rates in our broader monitoring of individual countries' economies and of the global economy. The 2007 Decision will certainly require sensitivity to the circumstances of individual countries. It will also require solid analytical tools for assessing the consistency of exchange rates with medium-run fundamentals in a multilaterally-consistent fashion—as embodied in the Fund in the work of our Consultative Group on Exchange Rates, or CGER. I see the papers prepared for the conference and the discussion of them as providing important support for the Fund's exchange rate analysis.

Finally, let me mention the issue of the political economy of exchange rates. I noted with great interest the paper that uses survey data to look at attitudes toward exchange rates of businesses in different sectors. This is a useful approach, which could be carried further. We certainly need to understand better the ways in which actors within states influence exchange rates.

This research may help to explain the asymmetrical situation in which while some countries resist a depreciation of their currencies, others are equally reluctant to see an appreciation. This reminds me of the words with which Jacques Polak concluded his masterly paper, "Fifty Years of Exchange Rate Research and Policy at the International Monetary Fund" in 1995. Jacques noted this asymmetry in exchange rate policies, and said that "countries often fail to take action needed to improve competitiveness, but they hesitate to take any action that would reduce it." We still need to understand why this is the case, and how we can encourage good exchange rate policies. I am very pleased that Jacques Polak is with us this morning, and that he will be giving us his views and advice on exchange rates later.

So again, let me say again how pleased I am to see you here, and how pleased I am that the Fund—through the work of its Research Department which has organized today's proceedings—is reaching out to the academic community, and opening up our own research to you. I wish you a good discussion, and I look forward to future discussions at future anniversary conferences paying tribute to Jacques Polak.

Thank you.