1. This chapter explained the costs and benefits of having fixed and flexible rates.
2. Fixed rates are most desirable when the economies in question are highly integrated and are subject to symmetric macroeconomic shocks.
3. Fixed rates are also useful as a way of imposing a nominal anchor, and as a way of insulating an economy from the adverse wealth effects of depreciation.
4. Finally, the chapter surveyed the history of exchange rate regimes, beginning with the gold standard, through Bretton Woods, up to today.
Exchange rate regimes have varied greatly across countries and across time and continue to do so. Explaining why this is the case and figuring out the optimal choice of exchange rate regime are major tasks in international macroeconomics.
We began this chapter by studying the main costs and benefits of fixed versus floating regimes. Fixing enhances the economic efficiency of international transactions. Floating allows authorities to stabilize an economy with monetary policy. The clash between these two goals creates a trade-off. Only with enough economic integration (more gains on transactions) and sufficiently symmetric shocks (less need for policy autonomy) do fixed exchange rates make sense, as shown in the symmetry-integration diagram.
However, other factors affect the trade-off, especially in emerging markets and developing countries: fixed exchange rates may provide the only credible nominal anchor after a high inflation, and they insulate countries with net foreign currency debt from the adverse wealth effects of depreciations.
Finally, we examined exchange rate systems in theory and in practice. Over the years, fixed rate systems such as the gold standard and the Bretton Woods system have come and gone, with collapses driven, at least in part, by failures of cooperation. That leaves us today with no real international monetary “system” at all, but rather many countries, and occasionally groups of countries, pursuing their own interests and trying to make the best choice of regime given their particular circumstances. As this chapter has shown, there may be good reasons why “one size fits all” will never apply to exchange rate regimes.