KEY POINTS

1. A wide variety of exchange rate regimes have been in operation throughout history to the present.
2. The benefits for the home country from a fixed exchange rate include lower transaction costs and increased trade, investment, and migration with the base or center country.
3. The costs to the home country from a fixed exchange rate arise primarily when the home and center countries experience different economic shocks and Home would want to pursue monetary policies different from those of the base or center country.
4. The costs and benefits of fixing can be summed up on a symmetry-integration diagram. At high levels of symmetry and/or integration, above the FIX line, it makes sense to fix. At low levels of symmetry and/or integration, below the FIX line, it makes sense to float.
5. A fixed rate may confer extra benefits if it is the only viable nominal anchor in a high-inflation country and if it prevents adverse wealth shocks caused by depreciation in countries suffering from a currency mismatch.
6. Using these tools and the trilemma, we can better understand exchange rate regime choices in the past and in the present. Before 1914 it appears the gold standard did promote integration, and political concern for the loss of stabilization policies was limited. In the 1920s and 1930s, increased isolationism, economic instability, and political realignments undermined the gold standard. After 1945 and up to the late 1960s, the Bretton Woods system of fixed dollar exchange rates was feasible, with strict controls on capital mobility, and was attractive as long as U.S. policies were not at odds with the rest of the world. Since 1973 different countries and groups of countries have gone their own way, and exchange rate regimes reflect the sovereign choice of each country.