Exchange Rate Systems, Incomes Policy and Stabilization Some Short and Long-Run Considerations
This paper concerns the choice of a preferable exchange rate system for the longer run of an economy which has finally emerged from an era of major disinflationary disturbance and disinflation. The discussion bears particular application to the Israeli case, but this provides a link to the major issues relevant to the world at large.
The range of practical choices is somewhat restricted, in the near future, by the still pending development of large common currency areas (especially in Europe), but the relevant issues in that potential choice are integrated into the analysis. Substantively, the analysis finds general superiority in a flexible or floating rate system - maintaining the independence of counter-cyclical monetary policy. It explores the major weakness in this alternative (destabilizing speculation) and the factors which many conduce to a common currency solution in the longer run.