TY  - JOUR
AU  - Dornbusch,Rudiger
AU  - Frankel,Jeffrey A.
TI  - The Flexible Exchange Rate System:  Experience and Alternatives
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 2464
PY  - 1989
Y2  - July 1989
UR  - http://www.nber.org/papers/w2464
L1  - http://www.nber.org/papers/w2464.pdf
N1  - Author contact info:
Rudiger Dornbusch

Jeffrey A. Frankel
Kennedy School of Government
Harvard University
79 JFK Street
Cambridge, MA 02138
Tel: 617/496-3834
Fax: 617/496-5747
E-Mail: jeffrey_frankel@harvard.edu
AB  - We review ten aspects of how floating exchange rates have worked in practice, contrasted with ten characteristics that the system was supposed to have in theory. We conclude that the foreign exchange market is characterized by high transactions-volume, short-term horizons, and an absence of stabilizing speculation. As a result, the exchange rate at times strays from the equilibrium level dictated by fundamentals, contrary to theory. We then look at ten proposed alternatives to the current system. Four entail decentralized policy rules: new classical macroeconomics, a gold standard, monetarism, and nominal income targeting. Four foresee enhanced international coordination: G-7 "objective indicators," Williamson target zones, McKinnon "world monetarism," and a "Hosomi Fund." Two propose enhanced independence: a "Tobin tax" on transactions, and a dual exchange rate. We conclude that one might build a case for intervention from the observed failure of international financial markets to behave as in the theoretical ideal, but that government intervention in practice is just as likely to fall short of the theoretical ideal
ER  -