The Fatal Flaw: The Revived Bretton-Woods System, Liquidity Creation, and Commodity-Price Bubbles

Abstract

Dooley, Folkerts-Landau and Garber (DFG) argue that the present constellation of global exchange-rate arrangements constitutes a revived Bretton-Woods system. DFG ALSO argue that the revived system will be sustainable, despite its large global imbalances. We argue that, to the extent that the present system constitutes a revived Bretton-Woods system, it is vulnerable to the same set of destabilizing forces - - including asset price bubbles and global financial crises - - that led to the breakdown of the earlier regime.

Keywords: Bretton-Woods system, international liquidity, price bubbles, Markov switching model

JEL Classification: C22, F33, N10