DP14488 Harry Johnson's "Case for Flexible Exchange Rates" - 50 Years Later

Author(s): Maurice Obstfeld
Publication Date: March 2020
Keyword(s): dominant currency pricing, effective lower bound, exchange rate regimes, Floating Exchange Rates, Global financial cycle, global value chains, international monetary system
JEL(s): F31, F33, F41, F42, N20, N24
Programme Areas: Economic History, International Macroeconomics and Finance
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=14488

Fifty years ago, Harry G. Johnson published "The Case for Flexible Exchange Rates, 1969," its title echoing Milton Friedman's earlier classic essay of the early 1950s. Though somewhat forgotten today, Johnson's reprise was an important element in the late 1960s debate over the future of the international monetary system. The present paper has three objectives. The first is to lay out the historical context in which Johnson's "Case" was written and read. The second is to examine Johnson's main points and see how they stand up to nearly five decades of experience with floating exchange rates since the end of the Bretton Woods system. The third is to review the most recent academic critiques of exchange-rate flexibility and ask how fatal they are to Johnson's basic argument. I conclude that the essential case for exchange rate flexibility still stands strong.