Two Arguments for Fixed Rates *

Few issues in economics have inspired so much debate as the issue of the relative desirability of flexible, pegged and fixed exchange rate systems for the world economy. Each system has its proponents, but at the moment by far the most favoured among economists is the flexible exchange rate system. In this paper two purely theoretical arguments are presented which tend to favour fixed exchange rates. ¹ The first argument focuses on the efficiency of the adjustment process under conditions of anything other than a perfectly flexible price level and the second on the efficiency of the allocation of real resources under equilibrium conditions. Given the current state of the debate, I take a system of flexible exchange rates as the alternative to a permanently fixed exchange rate system.