This method may be one way to begin to stablize a place like Zimbabwe, and, gad, may even do same for the world, instead of backing fiat paper with other fiat paper fortified with population and political masters requiring constant pleasing:
wsrn.com
DJ. Harvard's Frankel Floats Commodity-Based Forex Pegs Plan
Friday, July 12, 2002 11:55:21 AM - FWN Select
NEW YORK, Jul 12, 2002 (ODJ Select via COMTEX) -- By Michael Mackenzie
Of DOW JONES NEWSWIRES
(Dow Jones)--A novel proposal that small commodity-driven countries link their
exchange rate to the price of their principal export drew a cautious response
from panelists at the Council on Foreign Relations Thursday.
Harvard University's Jeffrey Frankel delivered a paper, entitled "A proposed
Monetary Regime For Small Commodity-Exporters: Peg the Currency in Terms of the
Export Price," during a discussion regarding the stabilization of emerging
market economies. Frankel was a member of President Clinton's Council of
Economic Advisors and is currently a member of the six-person business cycle
dating committee at the National Economic Bureau of Research.
His address was part of a conference on Government and the Economy: The Pros and
Cons of Counter-Cyclical Macro Policy organized by the Council.
While Frankel points out that his proposal is not appropriate across the board,
he says that for small countries where gold or another commodity such as oil
makes up a large share of national production and exports, a strategy of pegging
the currency to the price of gold might make sense. It would, he argues, keep
the country's exchange rate more in line with its own business cycle but also
bring it some stability.
The basis for Frankel's investigation of a commodity peg for currencies is that
the big selling points of floating exchange rates - monetary independence and
accommodation of terms of trade shocks - have not lived up to their promise."
Meanwhile "rigid pegs to the dollar are dangerous when the dollar appreciates
relative to other export markets."
Although such a move would mean forgoing the benefits of a discretionary
monetary policy, Frankel said that "some small developing countries have found
those benefits to be elusive at best."
Frankel says that a peg to gold for a small developing country could provide the
"enhanced credibility that the gold standard is traditionally supposed to
deliver, combined with the automatic adjustment to terms of trade shocks that
floating rates are in theory supposed to deliver."
During the late 1990's many commodity exporters suffered three external shocks
in the form of scarce international finance, a strong dollar and weak commodity
prices. Frankel says that, based upon simulation results he has conducted, had
these exporters been "pegged to the their principal export commodity at this
time, rather than the dollar, they would have gained export competitiveness at
precisely the time when their balance of payments was under maximum strain."
He added, "such countries as Bolivia, Ghana, Mali Papua New Guinea and Peru
would by 1999 have achieved stronger debt/export positions if they had been
pegged to gold," during this time. However, while conceding that "the commodity
peg will not always work in such a beneficial way as this," his study of the
situation "suggest that the idea is at least deserving of future exploration and
consideration."
Kenneth Kuttner from the Federal Reserve Bank of New York called it a "novel
proposal," and said it may be worth considering for some countries, but that
more work was required.
Richard Clarida, assistant secretary for economic policy at Treasury, was
"intrigued" with Frankel's proposal and said that the results may be more robust
than the author currently believes.
Further caution to Frankel's study was expressed by several members of the
audience, with reservations expressed over the ability of a commodity peg to
withstand a speculative attack.
-Michael Mackenzie; Dow Jones Newswires; 201-938-5451;
email:michael.mackenzie@dowjones.com |
