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The U.S and the emergence of flexible exhange rates : an analysis of foreign policy change by John S. Odell

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Political Science
POLI 354
Mark Brawley

Prepared by Jesse Abner KuriThe US and the emergence of flexible exchange rates an analysis of foreign policy change John S OdellThe aim of this paper is to explain the changes of the US monetary policy There are five factors that can influence foreign monetary policyBalance of payment situation military political situation domestic political situation organization and internal bargaining policy beliefs of senior officials But two factors are the most important balance of payment situation and intellectual factors policy beliefFramework for analysisUS balance of paymentsPolicy will change in response to the balance of payment or the marketWhen a country develops a deficit there will be excess supply of its currency in the foreign exchange market the market will push down its exchange rate If the government intervenes to defend its existing parity deficit will continue resulting in some economic costs Prevailing exchange rate will send signals to put resources into industries that are no longer favored by market condition reducing economic welfare and intensifying adjustment problem Imbalance will also attract speculators that may create short term capital shocksThis implies that rationally government favors freely floating exchange rate and refrain from market interventionSubstantial and persistent imbalance will lead government to adopt a policy of floating exchange rates or policy of exchange rate changeInternational military political situationIn the international system state objective is primarily national security and the accumulation and preservation of power while limiting rivals powerPower can be defined as military power and industrial capacity to produce weaponsChanges in the international military political situation are expected to produce changes in foreign economic policy as economic policy is a source of power and faster economic recovery of military alliances is important in being the front against Soviet UnionDomestic political situation
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