A Retrospective on the Bretton Woods system by Michael D. Bordo, Barry Eichengreen

By Michael D. Bordo, Barry Eichengreen

At the shut of the second one global warfare, whilst industrialized countries confronted severe alternate and monetary imbalances, delegates from forty-four international locations met in Bretton Woods, New Hampshire, which will reconstruct the foreign financial process. during this quantity, 3 generations of students and coverage makers, a few of whom participated within the 1944 convention, examine how the Bretton Woods procedure contributed to unparalleled financial balance and quick progress for 25 years and speak about the issues that plagued the approach and resulted in its eventual cave in in 1971. The participants discover adjustment, liquidity, and transmission below the procedure; how it affected constructing international locations; and the function of the foreign financial Fund in holding a good price. The authors learn the explanations for the System's luck and eventual cave in, examine it to next financial regimes, comparable to the eu financial method, and deal with the opportunity of a brand new fastened alternate cost for modern-day international.

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The overlapping generations model was developed by Allais (1947), Samuelson (1958), and Diamond (1965). The di¤erence between Ricardian and non-Ricardian models, notably for fiscal policy was studied by Barro (1974), who notably asked whether real bonds are net wealth. The cash-in-advance constraint is due to Clower (1967). In the original version the consumer had to carry cash from the previous period in order to consume. The timing we use (Helpman, 1981, Lucas, 1982), allows newborn agents to have positive consumption, a useful feature since the models we employ in this book will have newborn agents.

We know from equation (30) that there is such a Pigou e¤ect in the overlapping generations model. We know also from equations (33) and (36) that both the price determinacy and the liquidity e¤ect in the OLG model are due to the presence of W t in the central equilibrium equation (31). However, in the Ricardian model, we saw that although W t appears in budget constraints such as (5), it disappears in the consumption function (equation 10) or in the equilibrium equations (equation 12), and this leads to the bizarre properties of the Ricardian model.

Then the household always exactly satisfies the cash-inadvance constraint (2) so that mjt ¼ Pt cjt . 2 Dsþ1 Ps ðyjs À tjs Þ ð14Þ s¼t The Consumption Function Maximizing the utility function (1) subject to the intertemporal budget constraint (14) yields the first-order conditions: Dsþ1 Psþ1 cjsþ1 ¼ bDs Ps cjs ð15Þ Pigou Reconstructed: The Weil Model 27 Combining these first-order conditions and the intertemporal budget constraint (14) yields the following consumption function for a household j: " Dt Pt cjt ¼ ð1 À bÞ Dt ojt þ y X # Dsþ1 Ps ðyjs À tjs Þ ð16Þ s¼t Now insert into (16) the assumption above (equation 8) that yjs ¼ ys and tjs ¼ ts .

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