International Stabilization Policy Under Flexible Exchange Rates
H. Robert Heller outlines the adverse effects that the move to flexible exchange rates has had on international trade, international capital movements, and foreign investment. He takes the position that the increased uncertainty about exchange rate fluctuations has resulted in a significant increase in costs to the business sector and that the adverse effect of this uncertainty has been particularly evident in the decreased willingness of investors to undertake direct investment and long-term construction activity abroad. He also suggests that speculative capital flows may have accentuated rather than reduced the fluctuation in exchange rates. These increased costs, moreover, were not offset by any benefits associated with flexible exchange rates, such as greater freedom for domestic stabilization policies. Heller notes that it will be impossible to return to fixed exchange rates as long as national inflation rates differ so widely. He concludes with a series of recommendations for improving the functioning of the international monetary system under flexible exchange rates. To preserve the dollar standard, the United States must act to maintain the real purchasing power of the dollar. This, in turn, will require better control of monetary aggregates and will be facilitated by adoption of longer-term monetary aggregate targets.