Abstract
The proponents of flexible exchange rates advanced two core hypotheses which can, but need not necessarily be linked. Firstly, Milton Friedman argued that the replacement of the Bretton Woods system by a ‘system’ of floating currencies would reduce exchange rate volatility, by allowing financial markets automatically to interpret the macro-economic signals of national GDP growth, inflation, trade and payments balances with adjustments which would tend towards equilibrium.1 Secondly, Robert Mundell and others maintained that national monetary policy could be considerably more effective under a system of flexible exchange rates, since it would liberate policy makers from the dilemma of defending both external and internal stability, when either international growth cycles or structural trade asymmetries made this impossible under a system of fixed exchange rates. While subsequent empirical evidence indicates that the first hypothesis was seriously flawed and that the twenty-six years since the end of Bretton Woods has been characterised by severe and disruptive exchange rate volatility,3 the second hypothesis has at least some measure of plausibility about it, even if this applies more to the Bundesbank than to other agencies of monetary policy.
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© 2001 Jeremy Leaman
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Leaman, J. (2001). Towards Dominance: Central Bank Politics 1973–1982. In: The Bundesbank Myth. Palgrave Macmillan, London. https://doi.org/10.1057/9780230373419_5
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DOI: https://doi.org/10.1057/9780230373419_5
Publisher Name: Palgrave Macmillan, London
Print ISBN: 978-1-349-40912-9
Online ISBN: 978-0-230-37341-9
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