ABSTRACT
We have emphasized in our previous discussion the lack of an effective mechanism of balance-of-payments adjustment in the system of pegged exchange rates. The inadequacy of the adjustment mechanism has been reflected in the difficulties many countries have had in maintaining their exchange rates within the official limits. In order to keep their rates pegged, as we have seen, deficit countries need international monetary reserves in sufficiently large amount so that they are not forced to institute controls over trade and payments or to adopt policies that interfere materially with domestic economic stability. Surplus countries have to be able to absorb reserves for these same reasons.
