SDRs were created in 1969 to support the Bretton Woods fixed exchange rate system.
The balance of payments and exchange rates were making news, and the slow break-up of the Bretton Woods fixed-exchange rate system was under way.
FORBES: Farewell to James Parthemos (Richmond Fed Research Director)
But then, President Nixon took the dollar off that fixed exchange rate system, and it's very hard to imagine how we could go back there now.
The three key elements of this policy remained the adoption of a floating exchange rate system, the anchoring of monetary policy to the inflation target and the acceleration of banking sector reforms, he said.
Like any fixed exchange-rate system, a currency board offers the prospect of a stable exchange rate, which can promote both trade and investment.
So, this cumbersome and costly exchange rate management system either keeps investors sidelined or requires them to attach a hefty premium to any new undertaking.
The SDR was created in 1969, during the Bretton Woods fixed exchange-rate system, because of concerns that there was insufficient liquidity to support global economic activity.
In the 433 months since trading freely following 1973's demise of the Bretton Woods exchange-rate system, gold has had a 7.1% average annual return, achieved solely from six relatively brief spikes.
Though Denmark achieved a measure of stability in the 1970s by joining the European Community (now Union) and its exchange-rate system, in the other Nordic countries inflationary bubbles swelled, then burst in the late 1980s, toppling banks in Sweden, Finland and Norway.
Argentina, Latin America's fastest-growing economy last year, has the most rigid exchange-rate system of all, with a currency board that fixes by law the value of the peso at parity with the dollar, and thus limits the money supply to the level of foreign currency reserves.
That financial crisis, in the course of which the Italian lira was ejected from Europe's pre-euro exchange-rate system (along with Britain's pound sterling) coincided with a huge political crisis, as corruption investigations brought crashing down the parties that had dominated Italian politics for the past 40 years.
But he might not like a further corollary: under a target-zone system, responsibility for exchange-rate management, as well as for controlling inflation, has to be given to the same policymaker.
Eswar Prasad, a professor of trade policy at Cornell University, agrees with Paulson that the U.S. should work to help China establish a sound financial system instead of narrowly focusing on the exchange rate between the yuan and the dollar.
But a prolonged period of sky-high interest rates, which may be necessary to defend the exchange rate, can wreak havoc with a country's banking system.
The country's current foreign-exchange system, which involves a fixed "official" exchange rate that makes the currency, the kyat, more than 100 times as valuable against the dollar as the black-market rate, is so confusing that many foreign companies have refused to re-enter the country even if Western leaders ease sanctions against Myanmar, the country also known as Burma, as expected later this year.
However, in 1971 under President Richard Nixon, the Bretton Woods system collapsed and the major currencies shifted to a floating exchange rate regime.
But full liberalisation of interest rates and the exchange rate must still be some way off given the fragility of the banking system.
ECONOMIST: It is time for China to unshackle the price of money
The Chinese authorities have said that they will move to a more flexible exchange rate, but they will not be rushed, because the country's financial system is not ready.
If a second-rate exchange is first to attract a critical mass of trading, even a better trading system may fail to wrest business away.
With the benefit of hindsight, most economists have been critical of the August 2001 deal for Argentina, which simply postponed rather than prevented the collapse of the exchange-rate peg with the dollar and, with it, the country's banking system.
The yuan hit a high against the U.S. dollar under the current system Monday, after the central bank guided the currency to its strongest level via a reference exchange rate.
WSJ: U.K. Banks Sell $245 Million Dim Sum Bonds in Singapore
应用推荐