Int

1
Intl Monetary Crisis - II

• Attempts to Return to Fixed Rates

2
Readings

• BusinessWeek articles on dollar crisis
• New Eurocurrency Era
• More than a supersnake
• R.A.Mundell, Gold Would Serve
• Wall Street Journal articles on Bakers Plan for
  use of gold in price index

3
EMS Reasons

• Extreme instability of exchange rate markets
  undercut stable trade investment
• from Common Market to EU to ecu
• Europe aiming at monetary union in 1993
• monetary union ? political union
• EMS helps impose discipline w/in cos
• Triffinmain purpose of the agreement is to
  promote domestic policies combating inflation
• EMS would put pressure on cos w/less control of
  labor

4
How the EMS works

• EMS is extension of the snake that linked
  exchange rates w/in bands
• Bands 2.25
• fluctuations within ok
• fluctuations that exceed this would call for govt
  intervention, either
• directly inforeign exchange markets
• or, indirectly thru Keynesian methods
• Central Bank collaboration ? large pool

5
EMS Results

• For 1979-90, inflation WAS reduced (but this
  included Reagans depression
• Differentials btwn Europeans countries dropped as
  well
• But 79 - 87 ? 11 realignments of rates due to
  continuing internal problems
• EMS did NOT provide enough clout to end internal
  problems
• Crises like that in 1992 when UK withdrew bands
  were widened to 15

6
Gold Bugs Back Doors

• Search for alternative to dirty floats fixed
  rates brought revival of gold bugs
• Robert Mundell revives French arguments from 60s
  for revaluing gold coin surveillance supply
  side attacks on labor
• Treas.Sec.Baker tried sneaking gold in back door
  thru commodity price index
• Index would be used to inform OECD politics
  their coordination

7
Objections to Gold

• Commodity prices much more volatile than all
  prices, thus bad predictor
• Economists want policy free of any commodity,
  commodities ? role in prices
• Some say unemployment, not inflation, is the
  problem, but this has been minority view
• Upshot Gold has remained marginalized

8
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