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Volatile interchange rates and how to manage them are a contentious topic whenever economic policymakers gather in international meetings. This book examines the wide parameters of interchange rate policy in light of both high-powered theory and real-world experience. What are the costs and gains of flexible versus fixed interchange rates? How much of a role ought to the interchange rate play in monetary policy? Why don't volatile interchange rates destabilize inflation and output?

The essential finding of this book is that using monetary policy to fight interchange rate volatility, including through the adoption of a fixed interchange rate regime, leads to more outstanding volatility of employment, output, and inflation. In other words, the "cure" for interchange rate volatility is worse than the disease. This finding is demonstrated in economic models, in historical case studies, and in statistical analysis of the data. The book devotes significant attention to understanding the reasons why volatile interchange rates do not destabilize inflation and output.

The book concludes that galore countries would gain from permitting dandier flexibleness of their interchange rates in order to target monetary policy at stabilization of their domestic economies. Few, if any, countries would gain from a move in the opposite direction.

ReviewWith years of experience in policymaking, buttressed by academic research, Joseph Gagnon has formulated a masterful study of the interchange rate and it is role in the workings of the global economy. His account brings the most recent developments in international trade and macroeconomic theory to bear on both the determinants -- and effects of -- interchange rate movements. This book will prove valuable for any individual who seeks to grasp the ongoing debate over how to best develop macroeconomic policy in these uncertain times. ----Menzie Chinn, Professor of Public Affairs and Economics, University of Wisconsin

I was primarily impressed by Gagnon's book. It is in an outstanding manner comprehensive and without doubt or question written... ----Peter Kenen, Walker Professor of Economics and International Finance, Emeritus, Princeton University

It's now easy to catch up with the modern economics of interchange rates, since Gagnon's book provides the state of the art. He provides a comprehensive overview and makes a compelling case for drifting interchange rates. Any severe policymaker will want to have read it. ----Andrew K. Rose, Associate Dean and Chair of the Faculty, Haas School of Business, University of California

About the AuthorJoseph E. Gagnon, senior fellow at the Peterson Institute for International Economics since September 2009, was visiting associate director, Division of Monetary Affairs (2008-09) at the US Federal Reserve Board. Previously he served at the US Federal Reserve Board as associate director, Division of International Finance (1999-2008), and senior economist (1987-1990 and 1991-97). He has also served at the US Treasury Department (1994-95 and 1997-1999) and has taught at the University of California's Haas School of Business (1990-91). He is author of The Global Outlook for Government Debt over the Next 25 years: Implications for the Economy and Public Policy (2011). He has published a good deal of articles in economics journals, including the Journal of International Economics, the Journal of Monetary Economics, the Review of International Economics, and the Journal of International Money and Finance, and has contributed to assorted edited volumes. He received a BA from Harvard University in 1981 and a PhD in economics from Stanford University in 1987.