Scepticism about ad hoc agreements like the Louvre Accord and concern over financial market turbulence have added to the impetus for international monetary reform. Nevertheless there is still wide disagreement over the role of exchange rate management, how a new system should be designed, which policy rules to adopt and which countries will bear the burden of the inevitable adjustments. The Centre's conference on `International Regimes and Macroeconomic Policy', which took place in London on 8/9 September, was therefore particularly timely. The conference was organized by Barry Eichengreen (University of California at Berkeley and CEPR), Marcus Miller (University of Warwick and CEPR) and Richard Portes (CEPR and Birkbeck College, London), with financial support from the Ford Foundation and the Alfred P Sloan Foundation.
The distinction between systems, or `regimes', and policy rules is sometimes blurred: a fixed exchange rate regime can be seen as merely a coordinated set of exchange rate policy rules. International monetary arrangements have never been characterized by purely fixed or floating exchange rates, but have instead fallen somewhere in between, with varying degrees of explicit management. Any new exchange rate system would probably not constitute a regime in the old sense of rigid parities, but would probably involve more complex rules, which allow for flexibility and regular real realignments. Such a regime may also incorporate a higher degree of `linkage' between macro policies, involving rules for the coordination of all macroeconomic policies and not merely exchange rate realignments. These characteristics are generally thought necessary to correct the shortcomings of Bretton Woods, as well as the drawbacks of the present system of quasi-floating rates combined with ad hoc policy interventions. It is widely agreed that practical reform proposals must focus on systems of simple rules, rather than on fully optimal but highly complex policy designs (even if the latter could still help in designing the former). The papers presented at the conference touched on all these issues.

Historical Perspectives
Analyses of fixed exchange rates often characterize these regimes by their degree of `symmetry'. There are two competing hypotheses: the `symmetry hypothesis' states that every member of a fixed rate system is concerned with its healthy functioning and cannot afford to deviate from world averages. It must therefore follow the `rules of the game' by not sterilizing foreign exchange flows. Symmetric regimes also lack a system-wide nominal anchor and must rely on an external numéraire such as gold to fix the price level in the system. The competing hypothesis contends that fixed rate regimes are inherently asymmetric, characterized by a `centre country' whose macroeconomic policies provide the nominal anchor for the other members of the system.
Alberto Giovannini (Columbia University and CEPR) presented a variety of empirical evidence designed to discriminate between the two hypotheses in his paper, `How Do Fixed-Exchange-Rates Regimes Work: The Evidence from the Gold Standard, Bretton Woods and the EMS'. Giovannini examined the institutional structure and the behaviour of these three fixed rate regimes. His analysis revealed striking similarities between the Bretton Woods regime and the EMS. Both systems were characterized by the absence of an external nominal `anchor' and by elaborate arrangements for balance of payments financing. The institutional arrangements under which the three regimes operated did not seem per se to induce an asymmetric international adjustment, except in the case of Bretton Woods where the bilateral fluctuation bands of the dollar were narrower than those of the other currencies. Giovannini did find evidence of asymmetry in all three regimes in central banks' use of capital controls as an additional instrument of monetary management. His evidence suggested that central banks in the peripheral countries resorted to capital controls more frequently that did the centre country, although this evidence was less clear-cut in the case of Bretton Woods.
Barry Eichengreen welcomed the paper as further empirical evidence in support of the asymmetry hypo thesis. He noted that while fixed exchange rate regimes should in theory operate symmetrically, his own research had indicated that if member countries differed greatly in size, the problem of defection from the system increased, and this could lead to instability. He noted that Giovannini's paper did not address whether differences in policy-makers' preferences, rather than institutional features, could be responsible for observed asymmetries. John Williamson (Institute for International Economics) observed that the analysis did not imply that fixed ex- change rate regimes must necessarily be asymmetric; `blueprints' for reform should address this issue.
Steve Broadberry's (University of Warwick) paper, `Interdependence and Deflation in Britain and the USA Between the Wars', argued that the absence of international cooperation had led to the deflationary monetary policies pursued by Britain and the United States in the interwar period. Broadberry claimed that the most important characteristic of the interwar period was Britain's attempt to regain hegemonic dominance of the international monetary system in the early 1920s and America's uncertain acceptance, followed by its rejection of this hegemony in the early 1930s. During the 1920s Britain's return to the Gold Standard at the prewar parity can be seen as an attempt to regain hegemony, but because of wartime inflation this required deflationary monetary policy. Given continued US commitment to the Gold Standard, high interest rates in London had to be matched by high interest rates in New York, placing deflationary pressure on the world economy. In 1931, Britain abandoned the Gold Standard and pursued a policy of monetary expansion; maintaining the gold parity of the dollar required deflationary monetary policy in the US. Given the importance of the US in the world economy, offsetting expansionary monetary policy in Britain could not prevent a severe world depression. In 1933 the US broke the link with gold and effectively renounced any leadership role. In these circumstances, freed from the Gold Standard constraint, both Britain and the US were able to adopt expansionary monetary policy.
Broadberry argued that the failure to transfer hegemony smoothly from Britain to the United States was an important source of deflationary pressure in the world economy, although this did not necessarily imply that an ideal international monetary system would be hegemonic. He suggested that the outstanding feature of the interwar policy was the absence of international cooperation, not the nature of the regime. Cooperation would have yielded benefits irrespective of the international regime in operation.

Paul Turner (University of Southampton) noted that Broadberry's paper concentrated on monetary policy and did not consider fiscal policy, which could have played a role in the deflationary period. In addition, Broadberry's argument was that the bid for hegemony was the source of the deflation, whereas game theory literature suggests that Stackelberg leadership can improve other countries' welfare. Gerald Holtham (Shearson Lehman) asked why, if countries could pursue competitive deflationary policies by appreciating their currencies, could not this strategy work in reverse to produce competitive depreciations and hence inflationary policies? George Alogoskoufis (Birkbeck College, London, and CEPR) noted that France had a major role in the international economic policies of the interwar period, which could not be captured in a two-country model. Peter Ellehj (LSE) suggested that `unitary' approaches to coordination, which treated countries as if they possessed a single policy-maker, had not proved revealing. The analysis should therefore be extended to consider internal political processes and their repercussions on policy-making.

Keep it Simple?
In `Simple Rules for International Policy Agreements', Paul Levine (London Business School and CEPR), David Currie (LBS and CEPR), and Jessica Gaines (LBS) discussed a general methodology for analysing the sustainability of international policy agreements that took the form of simple rules. The authors sought to demonstrate empirically that policy coordination can be effective, given the constraint that the agreed rules must be simple. Their analysis revealed that agreements in the form of simple rules could act as surrogates for more far-reaching international agreements on policy coordination. Finally it was shown that simple rules are sustainable: indeed simplicity in policy design may actually improve the prospects for sustainability. Levine stressed that the paper presented to the conference was primarily methodological: future work would apply their methodology to a more developed multi-country model in order to assess other schemes for internationally coordinated policy rules, such as the target zone proposals of Williamson and Miller.
Frederick van der Ploeg (Tilburg University and CEPR) found it paradoxical that such complex mathematical techniques were needed to analyse simple policy rules. Both van der Ploeg and Barry Eichengreen noted that the authors had assumed that a&nbsppolicy-maker who reneged suffered punishment (through loss of reputation) for an indefinite period, in contrast to the single period assumed by Barro and Gordon. This made it likely that policies would be sustainable, since the cost of reneging was so high. David Currie conceded that in choosing an infinite punishment period, the model is biased towards sustainability, but it is not yet known how sensitive the results would be to this assumption.
There appears to have been an assumption in much of the literature that exchange rate management will automatically bring policy improvements, but there have been few attempts to estimate the gains which exchange rate targeting would bring. In their paper, `Exchange Rate Targeting as Surrogate International Cooperation', Andrew Hughes Hallett (University of Newcastle-upon-Tyne and CEPR), Gerald Holtham (Shearson Lehman) and G J Hutson (University of Newcastle-upon-Tyne) explored the possibility of using exchange rate targeting to obtain the benefits of broader policy coordination. They found that when countries adopted as a policy target an agreed exchange rate path (in addition to other policy objectives), there was little welfare gain relative to the non-cooperative Nash equilibrium. Adding an exchange rate target without the availability of another policy instrument led to a welfare loss which was not offset by the gains from the elimination of competitive appreciation or depreciation as a result of targeting. The level of welfare achieved was sensitive to the path chosen for the exchange rate, and only one path was found to be an improvement over the Nash non-cooperative equilibrium. The authors also investigated the optimal width of the target zone: as the bands on the exchange rate target zones became narrower, the overall welfare gains increased, while the distribution of the gains became more uneven and some countries were made worse off than in the non-cooperative equilibrium.
Their results contrasted with other findings, in which exchange rate targeting did yield improvements; but the authors argued that these other studies had failed to use the appropriate comparison, between targeting and a Nash non-cooperative equilibrium. Their results indicated that `casual coordination' was unlikely to prove successful: there should be either full coordination or none.
Paul Levine pointed out that while the paper investigated an agreed open-loop path, there was no requirement that the agreed rules be simple. He said that exchange rate management did not appear to be a good surrogate for policy coordination, but that the results depend on the objective function used. He found the methodology particularly interesting and noted that it could be used for other purposes.

Target Zones
The reform proposals advanced by Williamson and by McKinnon have received considerable attention, and their performance has been assessed through simulations of macroeconometric models. George Alogoskoufis assessed these proposals using instead an analytic framework, in his paper `Stabilization Policy, Fixed Exchange Rates and Target Zones'. This paper extended his research in an earlier CEPR Discussion Paper (No. 214, reported in Bulletin No. 24/25), where he used a small analytical model to compare the performance of Williamson's and McKinnon's proposals to that of optimal coordinated policies.
Neil Rankin (Queen Mary College, London, and CEPR) commented that most of Alogoskoufis's analysis compared fixed and flexible exchange rates rather than analysing target zones. David Vines (University of Glasgow and CEPR) welcomed the author's generalization of earlier work, but found that it did not explain why a fixed exchange rate would be optimal is it fiscal or monetary policy that absorbs supply shocks? Asked by Guido Tabellini (University of California, Los Angeles, and CEPR) whether his conclusions were sensitive to introducing a government budget constraint or adding dynamics, Alogoskoufis replied that the results were robust.
Some observers of the EMS have argued that free trade in goods, when coupled with the abolition of capital controls, will lead eventually to the disappearance of members' monetary autonomy. Marcus Miller (University of Warwick and CEPR) and Paul Weller (University of Warwick), in `Exchange Rate Bands and Realignments in a Stationary Stochastic Setting', reported research in progress which examined the compatibility of exchange rate management and monetary autonomy using a version of the Dornbusch model. Miller and Weller assumed that trade was free, capital was perfectly mobile and that exchange rates were managed through a system of adjustable bands. Prices were generated in their model as a random walk, as suggested in recent work by Krugman: the change in the price level depends on the deviation of output from its non-inflationary level plus a `white noise' disturbance. They examined the implications for monetary policy and exchange rates of announcing rules for realigning the exchange rate bands when the rate hits the edge of the band. Obstfeld has argued that in a system of fixed but adjustable exchange rates, if exchange rates accommodate domestic price changes then spiralling devaluation may result. Miller and Weller obtained different and less startling results in their model, which appeared to allow a wide set of stable outcomes, in contrast to results obtained from spec ulative attack models. Miller stressed that the work was still in progress and it would be premature to draw firm conclusions. In the future they intended to examine the non-stationary case and also to vary the perceived realignment policy which would be introduced if rates reached the edge of the band.
John Driffill (University of Southampton and CEPR) noted that prices feed back on monetary policy in the model and wondered why, if there are shocks to the price level, they are not accommodated through adjustments in interest rather than exchange rates. He thought the policy of stabilizing the exchange rate looked expensive relative to accommodating shocks via the interest rate. Patrick Minford (University of Liverpool and CEPR) said the EMS is about divergent money supply paths, rather than just accommodating price level shocks, as in Miller and Weller's analysis: monetary policy, rather than price level shocks, may be the cause of EMS realignments.

Strategies and Rules
The choice of whether to assign monetary or fiscal policy to maintaining external balance is complicated when the authorities are concerned with both the current account and the exchange rate. James Boughton (IMF), in his paper `Policy Assignment Strategies with Somewhat Flexible Exchange Rates', argued that macroeconomic policy in the large industrial countries should focus more on current account balances than on exchange rates, and should emphasize fiscal policies more than monetary policy in efforts to achieve external balance. The fundamental problem with the use of exchange rates, according to Boughton, is that the conditions under which there would be a reliable relationship between exchange rates and external balance are unrealistically restrictive. In addition, the effect of monetary policy on the current account is ambiguous: with increased monetary growth, interest rates fall, the real exchange rate depreciates and the current account strengthens; but with higher monetary growth, imports also rise, which offsets the tendency of the current account to improve. Boughton presented empirical evidence which indicated that monetary policy has little effect on external balance and set out some simple models that could explain this. He put forward a possible model of medium-term policy cooperation in which countries could first seek agreement on an appropriate range for real interest rates and then seek agreed objectives for current account balances and for the relative stances of fiscal policy that would be consistent with those balances. Finally, each country could use monetary policy independently to pursue internal balance. By allowing exchange rates to float freely, while containing current account imbalances through medium-term fiscal agreements, countries would be able to maintain independence to pursue their national interests, while contributing indirectly to exchange rate stability.
David Vines welcomed Boughton's search for simple rather than fully optimal policy rules, but noted that it is still debatable whether the current account is the best target for coordination: the exchange rate, for example, offers another potential target. Vines suggested that both monetary and fiscal policy rules should be designed to control both targets, rather than assigning fiscal policy to control the external balance and monetary policy to manage income or inflation. Vines also noted that Boughton's approach reversed Williamson and Miller's target zones proposal, which assigned fiscal policy to the internal object ive and monetary policy to the exchange rate. Neither Simon Wren-Lewis (NIESR and CEPR) nor Patrick Minford agreed with Boughton's inclusion of the current account in the policy-makers' objective function.
In `Exchange Rate Regimes and Policy Coordination', Patrick Minford used the Liverpool model to assess empirically whether monetary policy coordination could be beneficial, either by contributing to systematic stability, by promoting inflation discipline, or by reducing monetary transaction costs. Minford's analysis focused on the EMS and in particular the possibility of a European Monetary Union (EMU). He argued that the EMS suffered from a number of defects, which he attributed to the `quasi-fixity' of exchange rates within the System and the potential for members to pursue incompatible macroeconomic policies. This incompatibility would disappear if inflation were eliminated and monetary policy were no longer used for stabilizing output. This was no longer a distant prospect in Europe, according to Minford, and if it were realized, then the possibility of reducing transactions costs in Europe by fixing exchange rates in an EMU would become attractive. He concluded that an EMU, not the EMS `half-way house' of partial fixity, is likely to prove attractive in the medium term to politicians, certainly those in Britain.
In his discussion of the paper, Simon Wren-Lewis noted that Minford's model contained only one instrument fiscal policy instead of two, and it was not clear how the feedback rules worked. Alberto Giovannini was not convinced by Minford's argument that the EMS should be merely a transitional arrangement. He argued that Minford's analysis of the EMS ignored important issues essential to an assessment of its costs and benefits, such as the behaviour of real exchange rates across regimes. Marcus Miller also queried the model underlying Minford's analysis: the behaviour of capital movements when realignments are expected was not well captured, and expectations needed more careful treatment.
Whereas the other papers presented during the conference examined the general issues of macroeconomic coordination, John Williamson (Institute for International Economics) took a different approach in discussing `The Case for Returning to Mr Lawson's 1987 Macroeconomic Strategy'. Williamson contrasted the policies and performance of the British economy in 1987 with those of 1988. In 1987, Britain's economy was growing, unemployment was decreasing and inflation was under control. Fiscal policy was pursuing a nominal income target which was high enough to promote growth, but moderate enough to resist inflation. Monetary policy was assigned to an exchange rate target. In 1988, however, nominal income overshot target and the current account deficit indicated that the exchange rate target zone was too high. Nevertheless, interest rates were high, and the pound was at the top of its target zone. According to the strategy in his 1987 address at the IMF Annual Meeting, the Chancellor should have followed a policy of lower interest rates to raise competitiveness. Fiscal policy should have been tightened to offset the effects of monetary expansion on inflation, while allowing for growth and avoiding a current account deficit. Fiscal policy, however, was loose, as a result of increased government spending and lower taxes. Instead of allowing the pound to decline to restore competitiveness, the Chancellor supported it by raising interest rates to dampen inflation. Williamson advocated restrictive fiscal rather than monetary policy, with a rise in indirect taxes. Rather than balancing the budget, the Chancellor should be managing the economy, according to Williamson.
Williamson's interpretation met with some scepticism. Currie felt that the Chancellor had been more consistent than Williamson had suggested: 1987 had been a year of `good fortune', and 1988 had not.
In the past, policy-makers have paid relatively little attention to movements in commodity price indices, but there is now a growing awareness that they may contain useful information about movements in inflation. James Baker and Nigel Lawson have expressed interest in using commodity prices as an `anchor' for exchange rates and inflation. In `The Output and Inflation Cost of Adopting a Commodity Price Rule', Alison Hook (Foreign and Commonwealth Office) and David Walton (Goldman Sachs International) examined whether commodity prices were reliable enough indicators to have such an important role. Their tendency to overshoot their long-run equilibrium values suggests that reliance on commodity prices could lead to unnecessary over-reactions. Hook and Walton's simulations revealed that it is important to know the source of changes in commodity prices. They tested for two types of commodity price shocks; a `velocity' shock, in which goods prices overshoot, and a `supply' shock, in which they undershoot. In the first case they found that commodity prices could be a good indicator of future inflation, while in the second commodity prices rise with a fall in inflation. By reacting to supply shocks, monetary authorities risk introducing additional noise in monetary policy decisions; this could complicate the process of stabilizing inflation and retaining anti-inflation credibility. At times it may be clear that commodity prices reveal something about the underlying state of demand. In these circumstances it would seem desirable for policy-makers to respond, but this is a case for discretion rather than rules.
James Boughton noted that a policy-maker is presented with many indicators, of which commodity prices are just one. He thought commodity prices were a good indicator of turning points in consumer prices, but did not believe they could predict inflation.
The `credibility' of monetary and fiscal policy has come to occupy a central position in the analysis of policy design. There has been little research undertaken to date to attempt to test formally the notion of credibility: to identify those effects of macroeconomic policies which are caused by lack of credibility, and to estimate how much a lack of credibility has increased the costs of pursuing disinflationary policies. In `Empirical Testing of Strategic Theories', John Driffill (University of Southampton and CEPR) discussed recent work on this subject by Blanchard and others. Blanchard tested for systematic forecasting failure in reduced-form equations for the Phillips curve and the term structure of interest rates. If there were no perceived change in regime, the forecasts should continue to predict accurately. Blanchard found a systematic over-prediction of inflation as well as systematic prediction errors for interest rates. Other researchers had used Kalman filter techniques to represent the way in which agents revise their beliefs about monetary policy, based on observations of actual money supply growth.
David Begg (Birkbeck College, London, and CEPR) agreed that Kalman filters were the right approach. He noted that regardless of monetary policy, it was Thatcher's fiscal tightening at the bottom of a slump that earned her reputation. He suggested that governments should announce their intention to lower inflation, but not announce targets for monetary aggregates since the inaccuracy of models is likely to reduce credibility. More structure needs to be placed on the tests, and Kalman filtering provided that structure; more structure implies more assumptions, however, making hypothesis testing less clear-cut

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