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«Elke Muchlinski1 Explicit or implicit Monetary Coordination – Considering Historical And Future Aspects© Key words: currencies, central banks, ...»

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Krugman explained that the impact of target zones on exchange rate stability is due to the credible commitment of the target zones themselves (1992, 89). This guides expectations and determines the tangent condition of the curvature because it ties down the ends of "the-s-curve" (1992, 83). Credibility is based on a the central bank's ability to defend it, considering its limited reserves. Theoretical refinements and enrichments were provided – for instance – by Flood and Garber (1992), who emphazised the relevance of shift systems and the range of interventions for the credibility of target zones. An incompatibility of an exchange rate parity and target zones could be interpreted as an invitation for speculation. Another reason for a speculative attack, even if compatibility exists, is an expected system shift as a result of the speculation attack itself.24 The second group of suggestions contains the argument that a gold standard, currency board, pegged exchange rate or a fixed exchange rate system will provide more The considerable literature on monetary coordination is best reviewed by Hallet (1993), who deals with the exchange rate targeting mechanisms on certain aspects of economic performance.

Obstfeld (1986) presented a basic model. Obstfeld/Rogoff (1995) evaluated the connection between different types of target zones and speculative attacks.

Explicit or implicit monetary coordination? Dr. Elke Muchlinski 2002 26 stability in the foreign exchange market. These issues have always been at the core of debates concerning modifications to the international monetary system (Eichengreen 1999, C3). These proposals are regularly submitted to subdue inflation and exchange rate volatility. Regarding some countries, fixed exchange rates have also been interpreted as the cause of illness for which they are cited as a cure. They did not eliminate exchange rate risk for investors or provide a credible nominal anker for monetary policy as it is said in textbooks on open economies. Considering, for example, the Asian economies in crisis, fixed and immutable exchange rates led to the illusion that exchange rate risk can be avoided by foreign creditors and debtors. Defending currency boards or fixed exchange rates depends fundamentally on the amount of international reserves.

Furthermore, as some authors have mentioned fixed exchange rates and currency pegs are not a substitution for domestic policies.

Mundell suggested a gold standard because experience has shown that gold is a stabilizing factor. "Gold would again become a good standard of value if and only if it were made stable in terms o f commodities" (1995, 490). "Gold would today make an excellent unit of value for the world economy if the conditions for its stability existed" (1995, 488). These prerequisites are a "huge quantity of gold held in stocks" and "widerly dispersed in private hands" (1995, 488/89). Only the latter must be realized with wisdom to diversifying the gold holdings. If countries do not repeat the mistakes made in the 1920s and 1930s, and if they agree on gold policies of governments, then the gold-anchored international monetary system would be optimal. On the one hand, gold is to be seen as superior to international currencies–instead of the U.S.dollar or any other national currency – because "gold is nobody's liability and nobody can print it" (Mundell Explicit or implicit monetary coordination? Dr. Elke Muchlinski 2002 27 refers to Johnson on p. 486). On the other hand, he emphasized "whether gold is stable or not depends inter alia on the gold policies of governments" (Mundell 1995, 489).

If the stability of gold results from gold as a nonprintable factor (alone), why is it required to rely on international monetary arrangements and government agreements?

The question also arises as to why the loss in the U.S.dollar's attractiveness was caused by the instability of gold in the 1960s, while, according to Mundell's investigation, at the same time, "the U.S.dollar became even more important in international reserves" (1995, 484)? My objection is reformulated for clarity, substituting governments with central banks: Why did private and official agents lose confidence in the U.S.dollar as a medium of exchange, a unit of account, and a store of value? This question focuses on the liquidity premium of the U.S.dollar. Regarding the history of currency crisis Mundell concluded, "the missing factor is a stable world currency" which cannot be identical with the U.S.dollar. A "universal currency" could mitigate intabilities of the monetary system (1995, 492).

Regarding these contributions above, much criticism is found in the literature.

For the sake of illustration, Mussa (1995), f.i., argued that there is no need for improvement of the international monetary system.25 Let us add one aspect to this brief view on target zones and managed exchange rates: The U.S. treasury and the Fed, the finance ministers in the EMU and ECB, also the ministry and Bank of Japan today are Objections to international coordination are also reported by Kantzenbach (1990), Neumann (1991) und Vaubel (1981). Fischer stated, "so long as exchange rates remain flexible – and they will likely remain flexible among the three major currency areas – macroeconomic policy coordination among the major blocs is unlikely to advance Explicit or implicit monetary coordination? Dr. Elke Muchlinski 2002 28 opposed to target zones. In case of the United States, the reminiscence of those events in the early eightis where an overvaluation of the U.S.dollar hurt the domestic steel industry and diminshed its competitiveness dramatically is still conceivable.





Current debates on monetary coordination go beyond the pure idea of measuring the costs and benefits of maximizing one unique utility function of the world because it focuses on non-measurable cross-border events.26 The different types of monetary coordination pointed out that economic theories have been making progress in the analysis of economic interdependencies since the emergence of the old configuration of tripolarity. 27 In light of the theoretical outline introduced here, some authors suggest linking a model to contemporary world. No universal law can be a substitute for the requirement to think in terms of situations in questions. Fixed or flexible exchange rates, currency pegs, or currency boards are not universal solutions guided by universal law (Muchlinski 1998b). Economic theories are not devoted to market mechanisms guided by "hidden structures, mechanisms and tendencies", as adherents of the critical realism argue (Lawson 1997). According to critical realism, the world investigated by science is not a beyond the provision of mutual information and occasional agreements for specific policy tradeoffes" (1988, 39).

Many surveys documented the efforts of measuring the benefits and costs of international policy coordination. Most of them supported rather skepticism than optimism. Beyond this, many contributions focused on particular aspects of the comparisons and measurements itself, see, for instance, Frankel/Rockett (1986), Ghos (1991), McKibbon (1997).

Milner claims for a political economy approach to avoid still ongoing restrictions to international coordination. Economists and academics have failed to promote greater coordination because of the missing theory. They tend to shorten the topic to a question to be measured, oriented to the costs and benefits of coordination (1997, 180f.).

Explicit or implicit monetary coordination? Dr. Elke Muchlinski 2002 29 compilation of supposedly regular of events and experiences as asserted by Hume, but is fundamentally based on nonobservable "structures, mechanisms, powers and tendencies".28 By contrast, representative realism avoids referring to invisible structures, mechanisms, tendencies, or universal laws for two reasons: First, economics as a social science has unavoidably created all these structures, mechanisms, and tendencies it deals with. Second: there are no hidden factors except a lack of perception of these connections (Muchlinski 2001).

Regarding the proposals for interventions in markets, i.e., on target zones, fixed exchange rates, etc., all of these suggestions make clear that economic theories try to provide answers to perceived problems of open economies from different points of view.

Bryant (1995) basically refers to the regime-preserving approach as the new view on international coordination. The regime-preserving approach is opposed to the optimizing approach. In light of a new understanding of international coordination, Hamada and Kawai emphasize the regime-choice approach: "Regime preservation is nothing but a special outcome of regime choosing in each period" (1997, 136). The difference between Bryant's regime-preserving approach and Hamada/Kawai's regime-choice approach lies in the methods they apply to international coordination.

Some conclusions This briefly outlined controversy within the theory of international coordination is amazing because it leads to various a new consideration. I propose defining both apExplicit or implicit monetary coordination? Dr. Elke Muchlinski 2002 30 proaches to international coordination as a challenge to shaping monetary coordination. This attempt to shape monetary coordination is a significant paradigm shift that also expresses a shift in perception. Referring to a different theoretical understanding of the function of money as discussed in this paper.

The core of the theoretical outline of a configuration of tripolar focuses of the non-neutrality of money and currencies. It is applied to the exchange rate relations among three dominant currencies. The very roots of a configuration of tripolarity can be found in the interwar period, although the Franc remained in the background. The old configuration consists of U.S.dollar, d-mark, and yen, whereas the new configuration emerged with the displacement of the d-mark by the euro. The latter is a non-national currency, issued by a non-national central bank. Debates on advantage and disadvantage of fixed exchange rates or floating system cannot be separated from central bank policy.

Monetary coordination refers both to different degrees of flexibility or rigidity of exchange rates. Widespread disenchantment with both fixed exchange rate system and the variety of flexible exchange rates in theories and politics led to the view that exchange rate instabilities needed to be addressed. The proposals for improvements of the international monetary system are as diverse as the realm of analysis, but one consideration should be mentioned: Dealing with instability in the international monetary system requires a form of ex-ante coordination which is beyond any rigid rule. Against a historical background this paper sketches how the theoretical outline of a configuration of tripolarity can be referred to contemporary world without being normative.

For a critique on the Critical Realism approach to economics theory, see Baert Explicit or implicit monetary coordination? Dr. Elke Muchlinski 2002 31 Bibliography Arestis, Philip/Sawyer, Malcolm (1997) How Many Cheers for the Tobin Transaction Tax? In: Cambridge Journal of Economics, 21, 753-768.

Baert, Patrick (1996) Realist Philosophy of the Social Sciences and Economics: A Critique. In: Cambridge Journal of Economics, 20, pp. 513-522..

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Bergsten, C.F. (1999) America and Europe: Clash of the Titans? In: Foreign Affairs, March/April 1999, pp. 20-34.

Bergsten, C. Fred (1997) The U.S.dollar and the Euro. In: Foreign Affairs, Volume 76, No. 4, pp. 83-95.

Bergsten, C.Fred (1997a) The Impact of the Euro on Exchange Rates and International Policy Cooperation. In: Masson, Paul R./Krueger, Thomas H./Turtelboom, Bart G. (1997) (Eds.) EMU and the International Monetary System. Washington, IMF, pp. 17-48.

Blinder, Alan S. (1999) Eight Steps to a New Financial Order. In: Foreign Affairs, Volume 78, Nr. 5, pp. 50-63.

Blinder, Alan S. (1998) Central Banking in Theory and Practice. Cambridge/Massachusetts/London.

Blinder, Alan S. (1997) Distinguished Lecture on Economics in Government. What Central Bankers Could Learn from Academics - and Vice Versa. In: Journal of Economic Perspectives, Volume 11, Number 2, pp. 3-19.

Bloomfield, A. I. (1959) Monetary Policy Under the International Gold Standard, 1880New York.

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Explicit or implicit monetary coordination? Dr. Elke Muchlinski 2002 32 Branson, William H./Frenkel, Jacob A./Goldstein, Morris (1990) (Eds.) International Policy Coordination and Exchange Rate Fluctuations. University of Chicago Press.

Branson, W.H./Henderson, D.W. (1985) The Specification and Influence of Asset Market. In: Jones, R.W. /Kenen, Peter B. (Eds.) (1985) Handbook of International Economics, Vol. 2, Chapter 15, Amsterdam.

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Bryant, R.C. (1995) International Cooperation in the Making of National Macroeconomic Policies: Where Do We Stand? In: Kenen, P.B. (Ed.) (1995) Understanding Dependence. The Macroeconomics of the Open Economy. Princeton/New Jersey, pp. 392-447.

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Journal of International Economics 13, 267-289.

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