Turbulence in the foreign exchange markets: old and new lessons

Abstract

For many years, I have had the privilege of exchanging views on monetary and exchange rate matters with André Szász at least twice a month in various fora, notably in Basle and Brussels. His contributions to the discussion are a model of synthesis and combine wisdom with authority. In recent years, he has been the most consistent advocate of the three Dutch precepts for exchange rate stability: do not pretend that your monetary policy is autonomous with respect to that of the anchor country; maximize the central bank’s independence of political authorities and make full use of interest rates to prevent speculation by enhancing the market’s perception that risks are two-way. André’s wisdom is based on his long involvement in international monetary affairs; he often supports his arguments with examples from the Bretton Woods period, which he knows from direct experience and which he has studied carefully, particularly between 1972 and 1974, when he was a member of the Committee for the reform of the international monetary system (the Committee of Twenty). To pay tribute to his long career, I shall also turn back to the Bretton Woods system in an attempt to assess the extent to which the ‘lessons’ that can be drawn from the recent turbulence are really new.

‘It had become abundantly clear (by 1971) that when markets think an exchange rate is untenable, enormousflows of speculative funds can move from one currency to another’.^I