Earning My Money

In contrast to its predecessors—the gold and dollar standards—the current international monetary system has served the global economy well, even in the most difficult of times. During the Great Recession—the worst downturn in seventy years—the system exhibited great flexibility and resilience. Countries with flexible exchange rates, which account for 80 percent of global gross domestic product (GDP), used them to good effect as shock absorbers. Several countries with pegged rates switched to more flexible regimes during the crisis and some switched back again when confidence returned. These changes were nearly always orderly, with most currencies following a common path against the dollar, which retained its safe-haven status despite the fact that the United States was at the epicenter of the crisis: Currencies depreciated against the dollar during the worst of the crisis and then appreciated again once it ended. Though some currencies saw large real appreciation, most remained in line with fundamentals; misalignments occurred in only a few instances, usually related to the dysfunctional institutional set-up of the eurozone monetary union. Overall, the global economy avoided the balance of payments crises and protectionist responses that characterized previous episodes of acute economic turmoil.
For these reasons, it is difficult to conclude that today’s exchange rate system is fundamentally flawed. At the same time, a number of undesirable developments and responses have occurred in the aftermath of the Great Recession: some developing countries have excessive reserves; several countries have reluctantly resorted to capital controls; a few countries, including Brazil, Switzerland, and Japan, have seen very large exchange rate appreciations; the eurozone is in deep crisis; and fear persists that global imbalances may widen again as the recovery progresses.
by:
Jasleen kaur
II SEM