By Michael D. Bordo, Barry Eichengreen
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Extra info for A Retrospective on the Bretton Woods system
Dollar, as employed by Rose (1994), following the logic that the American currency has served more as a global currency than has the German mark. S. S. dollar, at least since the late 1970s. Thus, we clearly need to measure national exchange rate variability relative to a broad basket of external currencies. One obvious possibility would be to create a trade-weighted and capitalweighted measure of national currency variability. In practice, however, such a measure is problematic to construct for at least two reasons.
1. Measuring External Monetary Convergence To measure the extent of external monetary convergence and its converse, domestic monetary autonomy, I propose an operational indicator from the ‹eld of open-economy macroeconomics. 7 7. Rose (1994, 30) presented a continuous-time version of uncovered interest parity. Here I present the discrete-time equivalent. 1) is known as uncovered interest parity, where ∆e is a measure of exchange rate movements, i represents the domestic interest rate, and i * represents the prevailing external, or world, interest rate.
For example, faced with an economic decline and societal demands for more growth and employment, governments might desire to lower interest rates to stimulate economic activity. Alternatively, in an economy with rising prices and societal demands for domestic price stability, governments might like to raise interest rates to reduce in›ationary pressures. While there are certainly limits to what governments may be able to achieve domestically with interest rate changes, especially if market actors anticipate such changes in advance, democratic governments nonetheless perceive monetary policy independence as potentially desirable in at least the short to medium term.