ABSTRACT
It was pointed out in our previous discussion that the present-day system of pegged-but-adjustable exchange rates was designed to incorporate some of the automaticity of adjustment and certainty of the gold standard together with some of the flexibility of a system of freely fluctuating exchange rates. The automaticity of adjustment was supposed to be achieved through variations in money income and interest rates in deficit and surplus countries in response to changes in international reserves. Exchange rates were to be pegged within relatively narrow limits presumably to minimize the disruption of international trade and capital flows on account of exchange-rate uncertainty. In the event that a country’s balance of payments reflected a “fundamental disequilibrium” due to the occurrence of some structural change, adjustment could be sought by means of changing the exchange rate in an orderly fashion after consultation with the IMF. In this way, the domestic economy might be given more time to effect whatever adjustment was required for balance-of-payments purposes.
