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Thursday, September 22, 2005


Pablo Halkyard

Yes, the conference seems to be quite the line-up. I am trying to make it.

Just in case, that same day the Center for Global Development is having a symposium on the Future of the World Bank: http://www.cgdev.org/content/calendar/detail/3346/. Am trying to drop in to that as well.

Sarath Vidanagama

Any exchange rate system that ignore the problems facing low-income deficit countries is going to fail. The failure of the Bretton Woods system was also partly attributed to the hegemony of controling countries in the system.
A new international monetary system based on a single currency may be a solution to the presnt problem as Robert mundells proposes. But the system should be more concerned about Low- income BOP deficit countries. Unless this is adddressed any reform is not going to work properly.

Arthur Eckart

Sarath, even in the small country case the vectors in the Mundell-Fleming model will equalize appropriately. A hard currency may eventually be substituted in your example and the world currency is effectively the U.S. Dollar. So, the current system works properly.

Sarath Vidanagama

I dont see any comments regarding the reform of the IMF for the last six months. I wonder the matter is closed for ever! or nobody is interested in the reform of the IMF to make it an organization that is geared to, facilitate (a) proper adjustment mechanism, ( because the current adjustment based on so called free float has become a farce as more and more subtle ways are used to intervene indirectly in the exchange rate determination)which is the most important feature of any internatrional monetary arrangement. The failure of the current system, as everybody kinows, was mainly due to the unequitable adjustment mechanism that was forced upon the deficit countries. The entire burden of adjustment fell upon the developing world who were facing continous deficits due to the policies advocated by the system itself.
(b) resolve the liquidity problem facing the international commuity, especially deficit countries who are experiencng fundamental disequilibrium in the BOP (C) proper governence of the international monetary system that ensures equitable sharing of power, unlike in the present system where voting power is concentrated within an exclusve group whcih determines major policy matters, making iy tuely a world system.

What are the possibilities of moving the sustem into a "one world system" as proposed by Keynes long time ago at the Bretton Woods negotiations? Theses are some of the issues that needs the attention of people who are interested in a proper reform of the international monetary system. Unfortunately some of these issues are not even considered by the people who really weild power in the IMF. Reulting dissatisfaction among the majority of member countries has created a loss of confidence among these countries of the existing management.

IMF prescriptions to the developing world, over the last few decades, have substantially failed. Structural adjustment policies adopted by these countries for few decades resulted in increasing trade imbalances, increase in foreign debt and BOP crisis.

We have to address all these issues when we talk about reform, and not just a another systen that favours only a limited number of countries.

Arthur Eckart

I agree, some economic development policies in Third World countries have failed. However, global imbalances of production and consumption were created to a large extent by export-led developing countries through expansionary monetary policies, e.g. buying U.S. dollars and selling their currencies, and through trade barriers, including closing their markets to foreigners. Some countries value production more than other countries, e.g. to increase or maintain employment. Overproduction has induced demand.

Sarath Vidanagama

Need for the reform of the IMF is much greater now tahn before as the cuurency fluctuation affects the entire world. Current international monetary arrangements are so unsatisfactory that even the major reserve currency countries are facing exchange rate problems. The recent trends in the dollar exchange rate against the Pound and the Euro and the movements of the Yen clearly shows the instability of the post Bretton Woods excahnge rate system.

The real burden of the volatile nature of exchange rates falls on developing nations. The entire history of international monetary arrangements substantiate this phenomenon. It is high time some stabilizing measures are implemented. In this context the burden of adjustment should equally borne by both DCs and LDCs.

The real burden of the volatile nature of exchange rates falls on developing nations.

Oh, why? … pray tell.

The volatile nature of exchange rates is an attribute of the international monetary system where huge amounts of money are sloshing about daily/hourly.

This money belongs to multinationals, individuals, investment banks and countries. So, how on earth could it be the responsibility of DCs alone? There are no multinational companies in the LDCs. The LDCs do not invest their reserve funds wherever the return is highest?

You are over-simplifying the problem to find a scapegoat, methinks.


"There are no multinational companies in the LDCs."

Huh? Really?


There should have been a question mark to that statement, Vishaan.

Arthur Eckart

The current floating exchange rate system is working properly. The goods market-money market-foreign exchange market shift with changes in currency exchange rates and interest rates. These markets are generally in equilibrium and more easily adjust than under fixed exchange rate systems. Obviously, the global economy has been more "stable" after WWII, through flexible market adjustments.

Arthur Eckart

The current global economic imbalance has been caused by more countries favoring and maintaining production over consumption. Consequently, these countries central banks buy U.S. dollars to stimulate output (which means selling their currencies) and then buy U.S. Treasury bonds. However, this policy has benefited the U.S. much more than the foreign countries (since the U.S. favors production and consumption roughly equally). The U.S. has been able to maintain output growth with large and growing trade deficits. For example, from 2001-06, the change in U.S. output divided by the change in U.S. labor input was over four times higher than in 1993-98, which helps offset large increases in U.S. negative net exports. Over the next few years, U.S. export growth should accelerate to maintain output growth (initially, through the foreign exchange market). So, these foreign economies will continue to gain less or lose more than the U.S.

AE: "The current floating exchange rate system is working properly."

Said like a true American, where US industry is benefiting presently with an under-valued dollar (by about 12 to 15%).

Still got your blinders on, AE?

Arthur Eckart

Lafayette, aren't we lucky you know the real values of goods, interest rates, and currencies in the global economy.

Arthur Eckart

U.S. output has been generally below potential output, since 2001, while U.S. trade deficits increased (and were $40 billion to $70 billion a month over the past 4 1/2 years or over $800 billion in 2006). Negative net exports lower output (cetirus paribus). The U.S. dollar didn't depreciate further, because of lower foreign incomes, higher foreign trade barriers, expansionary foreign monetary policies, etc. However, it seems, U.S. trade deficits are beginning to shrink (from faster U.S. export growth than U.S. import growth and after the J-Curve Effect). The U.S. dollar is near its all-time low. So, the floating exchange rate system is working properly, within other markets. It seems, a precipitous fall in the dollar would coincide with the economic collapse of one or more export-led economies (i.e. economic boom/bust cycles), although that wouldn't be enough to create U.S. trade surpluses.

Arthur Eckart

Also, I may add, many normal goods are luxury goods in some export-led economies. So, to purchase those goods, incomes need to rise (rather or more than exchange rate adjustments). Also, trade barriers can limit imports regardless of exchange rates.

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