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Exchange Rate Arrangements and Disarrangements:Prospects for a World Currency

Sergio L. Schmukler

 

*
Development Research Group
World Bank
March 1, 2006

 

 

Abstract

This note evaluates the prospects for a world currency, using as a departure point the papers by Bordo and James (2006) and Cooper (2006). The note argues that a world currency is unlikely in the foreseeable future and probably undesirable. Although more evidence is needed, there seem to be no strong forces towards the creation of new monetary unions among the countries with major currencies or between those countries and the periphery. Based on recent experience, the note also argues that one of the main benefits to establish a world currency, the elimination of exchange rate uncertainty, is likely less important than commonly believed. No matter how rigid a currency arrangement is, initiatives to dissolve it tend to appear as bad times arise. Still, the present equilibrium of no world currency leaves unresolved many difficult issues related to the functioning of the domestic and international monetary systems.

JEL classification codes: F31; F33

Keywords: currency regimes; currency union; floating exchange rates; peg; financial

Crises

 

* This note was prepared as a comment to the papers “Proposal for an OECD Currency” by Richard N.

Cooper and “One World Money, Then and Now” by Michael Bordo and Harold James, presented at the

conference “Regional and International Currency Arrangements,” February 24 and 25, 2006, Vienna,

Austria, organized by the Bank of Greece and the Oesterreichische Nationalbank (Central Bank of Austria). The papers and discussions from this conference will be published in a special issue of the International Economics and Economics Policy. I thank conference participants for useful comments. I am also grateful to Jose Azar and Francisco Ceballos for excellent research assistance. The views expressed in this paper are entirely those of the author and do not necessarily represent the opinion of the World Bank.

 

E-mail address: sschmukler@worldbank.org Website: http://econ.worldbank.org/staff/sschmukler

 


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