How Do Fixed-Exchange-Rates Regimes Work: the Evidence from the Gold Standard, Bretton Woods and the EMS

Abstract

This paper defines two competing hypotheses on the working of fixed exchange rates. The "symmetry" hypothesis states that every country is concerned with the good functioning of the system, and cannot afford to deviate from world averages. Every country is just left to follow the rules of the game," that is to avoid sterilizing balance of payments flows. The world price level is pegged down either by an external numeraire like gold, or by cooperation among central banks, in a fiat currency system. The competing hypothesis states that fixed-exchange rates regimes are inherently asymmetric: they are characterized by a 'center country" which provides the nominal anchor for the others, either by managing the gold parity in a centralized fashion, or by arbitrarily setting some other nominal anchor. I discuss the empirical evidence to discriminate between the two hypotheses, by studying the institutional features and the data on three experiences of fixed rates: the International Gold Standard, the Bretton Woods regime, and the European Monetary System.