Alternative exchange-rate systems: another look at the Modigliani-Askari analysis
Keywords:Exchange rate regimes, floating rates, sliding parities, fixed rates
For better or for worse the world has drifted into a system of managed floating exchange rates. However, despite a series of economic and political shocks, the experience with floating rates has been reassuring. Recent history provides an interesting backdrop to the Modigliani-Askari argument for short-run “exchange-rate fixity”, coupled with long-run “exchange-rate variability”. Their case for sliding parities, as compared with either floating rates or infrequently-adjusted fixed rates, is new and thought provoking. Nonetheless, the present work argues that this case fails to withstand careful examination. According to the authors, reasonably clean floating rates remain the superior option.