1 The Exchange Rate System: Some Issues

IT is now more than a decade since the world abandoned the system of fixed but adjustable exchange rates which was the center-piece of the old Bretton Woods system. That system collapsed in 1973 with no official agreement on what was to replace it, and the major currencies were set afloat in world currency markets. These arrangements, which at first had no official international sanction, were later legitimised by the Second Amendment to the Articles of Agreement of the IMF in 1978 which allowed members to adopt exchange rate arrangements of their choice. The new system, which some have called a "non-system", is characterized by a mix of exchange rate arrangements. Major currencies float relatively freely in world currency markets. The countries forming the European Monetary System float as a group against other major currencies and maintain a form of managed floating within adjustable margins against each other, with well defined rules of intervention backed by currency swap arrangements. The developing countries have not resorted to independent floating but have ether pegged their currencies to one of the major currencies or, increasingly to a basket of currencies. Whatever the exchange rate arrangements adopted, all countries face a world in which exchange rates vary