Floating Exchange Rates in an Interdependent World

GAO sponsored a symposium of specialists on exchange rate behavior. The seminar participants addressed the yen-dollar exchange rates and analyzed the implications of floating exchange rates and economic interdependence on the conduct of national macroeconomic policy and the future of the international financial system.

GAO found that it is questionable whether some policy to manage exchange rates can mitigate or reverse the adverse economic effects of exchange rate behavior. One analyst noted that there are alternative definitions of exchange rate overvaluation and several plausible sources of overvaluation. The limits to research in exchange rate behavior partially explain the disagreement over exchange rate management policy, and forecasting long-range exchange rates has not been successful. Although the symposium participants agreed that floating exchange rates cannot insulate an open economy from external economic disturbances or contain domestic disturbances within a single economy, they agreed that flexible exchange rates are superior to fixed rates. Panelists also agreed that policies aimed at countering misaligned exchange rates will have limited success if national macroeconomic policies differ markedly. Furthermore, a policy that addresses only the exchange rate, without addressing monetary and fiscal policies, can have only limited success.