Harry Johnson's “Case for flexible exchange rates”—50 years later

Abstract

Fifty years ago, Harry G. Johnson published "The Case for Flexible Exchange Rates, 1969", its title echoing Milton Friedman's classic essay of the early 1950s. Though somewhat overlooked 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 exchangerate flexibility and ask how fatal they are to Johnson's basic argument. I conclude that the essential case for exchangerate flexibility still stands strong. K E Y W O R D S dominant currency pricing, effective lower bound, exchange rate regimes, floating exchange rates, global financial cycle, global value chains | 87 OBSTFELD 1 | INTRODUCTION When Gianluca Benigno invited me to speak at the 50th anniversary conference of the Money, Macro and Finance (MMF) Research Group, I was struck at how opportune the time would be to revisit Harry G. Johnson's well-known polemic of the 1960s, "The Case for Flexible Exchange Rates, 1969" (Johnson, 1969). My belief rested on four considerations. First, Johnson's piece is exactly a half-century old-making 2019 a good time to re-evaluate in light of the subsequent international monetary experience. Second, it was also 50 years before that Johnson helped to found the MMF's precursor, the Money Study Group-so there is a lot more theory and empirical research to bring to the table, in no small part due to the efforts of Johnson, his colleagues, and their successors. Third, the national context in which Johnson wrote-in which fears of British economic decline eventually led the U.K. government to seek more policy independence by floating sterling, while also seeking supply side renewal and geopolitical influence through more intimate integration with the rest of Europe-is instructive to recall in these days of Brexit. Finally, the normative implications of exchange-rate flexibility are again under scrutiny in the academic literature, as they have been periodically at least since the Bank of England suspended gold convertibility in 1797. To what extent do the newer insights undermine or validate Johnson's arguments? Several days after I devised my lecture plan, I emailed Gianluca to ask his opinion of the proposed topic. Only then did he inform me that the MMF organizers had scheduled me to give the Harry G. Johnson Lecture. Evidently, there was no turning back, and what follows is the result. This paper, therefore, 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 Bretto...

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