Fixed versus Flexible Exchange Rates: The Everlasting Debate
The origin of the debate on fixed versus flexible exchange rates in its modern form is arguably Friedman’s (1953) piece ‘The Case for Flexible Exchange Rates’. Friedman strongly rejected the conventional wisdom of the time, arguing that flexible exchange rates are ‘absolutely essential for the fulfillment of our basic economic objectives: the achievement and maintenance of a free and prosperous world community engaging in unrestricted multilateral trade’. On the other hand, he argued against fixed exchange rates by asserting that ‘there is scarcely a facet of international economic policy for which the implicit acceptance of a system of rigid exchange rates does not create serious and unnecessary difficulties’. It must be emphasized, however, that Freidman distinguished between ‘flexible’ and ‘unstable’ exchange rates. In this sense, he advocated as the ‘ultimate objective’ what he described as ‘a world in which exchange rates, while free to vary, are in fact highly stable’. However, he argued that the elimination of exchange rate instability by ‘administrative freezing’ of exchange rates cures none of the underlying difficulties and only makes adjustment to them more painful.
KeywordsDepression Income Assure Nash Volatility
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