Money and exchange-rate regimes: theoretical controversies

Abstract

It is common to suggest that alternative exchange-rate regimes are not related to different theoretical views about the workings of the economic system or to different schools of economic thought. This paper, however, emphasizes the relationship between alternative exchange-rate regimes and the different conceptions of money and of the role of the market as an economic regulator. When an exchange-rate regime is selected decision makers expect to achieve macroeconomic goals such as stimulating real economic growth and attaining long-run price stability. But these results stem from divergent theoretical understandings of money and its effects on the real economy — the neutrality or non-neutrality of money — and from the acceptance or rejection of the classical ergodic axiom of efficient market theory. Hence, we support the argument that underlying the choice of an exchange-rate regime there are different theoretical views. The aim of this paper, therefore, is to examine the main disagreements between the different prescriptions about exchange-rate regimes using as background the articulations between exchange-rate prescriptions and the monetary conceptions of different theorists. Exchange-rate regimes come in three varieties: pegged (fixed, but adjustable), floating, and fixed.