Question

What happened to the relative volatility of exchange rates relative to macroeconomic aggregates, such as GDP, after the break-up of the Bretton Woods system in the early 1970s? In what sense have the currency movements since then resembled salient facts about other fnancial variables, such as listed equities?

(Please be brief.)

Answer 1

The US decision to suspend gold convertibility ended a key aspect of the Bretton Woods system. The remaining part of the System, the adjustable peg disappeared by March 1973. A key reason for Bretton Woods' collapse was the inflationary monetary policy that was inappropriate for the key currency country of the system.

Macroeconomic Policy and Coordination Under Floating Exchange rate

• Discuss how commodity-price and policy disturbances raised inflation and unemployment in the early years of floating exchange rates (1973–1980).

• Summarize how the monetary and fiscal policies of a large country such as the United States are transmitted abroad.

• Describe the effects of the disinflationary and fiscal policies followed by the United States in the 1980s and the role of international policy coordination.

• Discuss how the world economy has performed in recent years and what lessons the post-1973 experience holds for reform of the international monetary system.

Under the Bretton Woods fixed-rate system, countries other than the United States had little scope to use monetary policy to attain internal and external balance. Countries could hold their dollar exchange rates fixed only if they kept the domestic interest rate in line with that of the United States. Thus, in the closing years of fixed exchange rates, central banks imposed increasingly stringent restrictions on international payments to keep control over their interest rates and money supplies. These restrictions were only partially successful in strengthening monetary policy, and they had the damaging side effect of distorting international trade

• foreign Exchange (forex or FX) is a global market for exchanging national currencies with one another.
• Foreign exchange venues comprise the largest securities market in the world by nominal value, with trillions of dollars changing hands each day.
• Foreign exchange trading utilizes currency pairs, priced in terms of one versus the other.
• Forwards and futures are another way to participate in the forex market.