Introduction: Purpose and Scope

Abstract

The debate over fixed versus flexible exchange rates is one of the longest running sagas in the international economics literature. The case for flexible exchange rates, as it was initially and forcefully put by Friedman (1953) and Johnson (1969), had as one of its pillars the claim that it would provide for a more efficient system of international adjustment. In this context, the advent of floating exchange rates after the breakdown of the Bretton Woods system was greeted with enthusiasm, as it was felt that currencies had moved way out of line from their equilibrium rates during the Bretton Woods era. Under the floating exchange rate regimes, foreign exchange markets around the world have been characterised by a considerable amount of variability, and it has not been uncommon to find bilateral exchange rates displaying wide fluctuations on a month-to-month or even day-to-day basis. However, the initial enthusiasm about the expected equilibrating role of floating exchange rates began to wane as the trade balances of the major trading nations have continued to show remarkable resilience to such changes.