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Bretton-Woods systems, old and new, and the rotation of exhange-rates regimes

By Stephen G. Hall, George Hondroyiannis, P. A. V. B. Swamy and George S. Tavlas

Abstract

A recent contribution to the literature argues that the present international monetary system in many ways operates like the Bretton-Woods system. Asia is the new periphery of the system and pursues an export-led development strategy. The members of the new periphery peg their currencies to the U.S. dollar at undervalued exchange rates and accumulate foreign reserves. In contrast, the old periphery - - consisting of Western Europe, Canada and parts of Latin America - - interacts with the centre with flexible exchange rates; its aggregate current account has been roughly in balance. As under the older system, the United States remains the centre country, pursuing a monetary-policy strategy that overlooks the exchange rate. An implication of this argument is the following asymmetry hypothesis: under both regimes the United States does not take external factors into account in conducting monetary policy while the periphery does take external factors into account. We provide results of a test of the asymmetry hypothesis. Then, we present a new method for decomposition of the business cycle using a time-varying-coefficient technique that allows us to test the relationship between the cycle and macroeconomic policies. We apply this technique to five countries for three sub-periods over the 1959 to 2007 period

Topics: revived Bretton-Woods system, asymmetry hypothesis, time-series decomposition, time-varying-coefficient estimation
Publisher: Dept. of Economics, University of Leicester
Year: 2009
OAI identifier: oai:lra.le.ac.uk:2381/7606

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