Exchange-rate flexibility

Abstract

In recent years officials in charge of international monetary affairs have slowly moved towards the crawling peg, which can be explained by an understandable cultural lag. At any rate, however, most have arrives at the position that greater flexibility is needed in the exchange rate system. The present article presents an in-depth analysis of the issue of flexibility in the exchange rate system. The author fist looks at the meanings of flexibility before considering the role of prices in economic adjustment and aggregate-demand adjustment. Temporary imbalances and selective controls are dealt with and historical context on the evolution of the system is provided. The various types and methods of flexibility are then detailed. The author concludes that, despite political resistance, economists should argue for freely flexible exchange rates or smoothly gliding parities.

JEL: E42