DP266 | The International Monetary System: An Analysis of Alternative Regimes

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This is an exercise in the positive economics of alternative monetary regimes. The behaviour of output and prices is compared using a stochastic specification which allows asymptotic variances to be obtained without difficulty. Free floating of exchange rates together with national money supply targets is analysed first, with and without the presence of `fads' in the exchange rate. Two alternatives for monetary coordination are then considered. First, McKinnon's proposal to fix nominal exchange rates and stabilize aggregate monetary growth (or average inflation); second, Williamson's system of Target Zones for stable real exchange rates, complemented by nominal income targets for fiscal policy.