Roger Vicquéry and Kevin Hjortshøj O’Rourke
Whereas the collapse of the Bretton Woods system in 1973 has historically been seen as heralding a significant shift in the direction of floating alternate charges, the extent of this transition away from mounted preparations has been referred to as into query by a ‘New Consensus’ view. We offer a brand new index to measure alternate price fixity on the world stage, which restores the standard account of worldwide financial historical past over the past 70 years: in line with our measurement world alternate price fixity is now solely a couple of third of its Bretton Woods stage. We spotlight how this transition to floating preparations was largely pushed by anchor currencies ceasing to be pegged to at least one one other.
The usual narrative of the modern evolution of the worldwide financial system, typically framed inside the context of the worldwide macroeconomic trilemma (Obstfeld et al (2005)), means that the world transitioned decisively in the direction of floating alternate charges after the collapse of the Bretton Woods system in 1973. This shift was seen as extra suitable with open worldwide capital markets in comparison with the mounted alternate price regime that characterised the Bretton Woods period.
Nonetheless, this typical knowledge has been challenged by a ‘New Consensus’ view (Ilzetzki et al (2022)). Reinhart and Rogoff (2004) first launched classifications of alternate price regimes based mostly on precise alternate price behaviour reasonably than official declarations. They argued that when specializing in de facto reasonably than de jure alternate price preparations, post-1973 alternate charges seem far more mounted than beforehand thought. Ilzetzki, Reinhart and Rogoff (2019), henceforth IRR, prolonged and up to date the unique country-level classification. When aggregating up country-level classifications on the world stage, by computing the share of nations with fixed-exchange price regimes (with or with out GDP weighting), IRR posit a powerful continuity in alternate price preparations from the Bretton Woods period to the current alongside two key dimensions. First, they argue that the prevalence of versatile alternate price preparations is just marginally larger right this moment than it was earlier than 1973. Second, they contend that the US greenback’s function as a financial anchor is as prevalent and, by some metrics, extra important right this moment than it was throughout the Bretton Woods period. We revisit each conclusions in a current paper (O’Rourke and Vicquéry (2025)).
One mechanical cause why IRR discover larger shares of nations with fixed-exchange price preparations, each in uncooked phrases and weighted by GDP, is the classification of eurozone members as having fixed-exchange charges. Their method is according to the macroeconomic trilemma, ie particular person international locations inside the eurozone have given up unbiased financial coverage, which permits them to realize a fixed-exchange price alongside free capital flows. Nonetheless, it contrasts with the Worldwide Financial Fund’s classification of those international locations as floaters. Whereas it’s tough to argue that international locations like Eire or Portugal have floating currencies, so is to contemplate that Germany moved from a versatile to a fixed-exchange price with the creation of the euro in January 1999, and that the euro space as an entire isn’t a floating entity. There’s then a level of arbitrariness in indices of worldwide alternate price fixity that depend on such judgment calls. For instance, if the eurozone international locations had been to cross a threshold of political integration for them to be thought of a single, floating entity, the measures of worldwide alternate price fixity underpinning the ‘New Consensus’ would shift discontinuously downward.
To handle this problem, we introduce (O’Rourke and Vicquéry (2025)) a brand new methodology to combination country-level alternate price regime classifications: an index that displays the chance that two models of GDP, randomly chosen wherever on this planet, will come from international locations whose currencies are pegged towards one another. Such an index boils all the way down to computing the whole variety of GDP-unit matches involving both fixed-exchange charges or a standard forex (thus together with within-country matches), counting on the classification of IRR, and dividing this by the whole variety of attainable GDP-unit matches worldwide. The index due to this fact varies from 0 – a scenario the place every unit of worldwide GDP has its personal forex, all of which float towards one another – to 1, in which there’s a single world forex or a fixed-exchange price regime encompassing all currencies.
Our index is due to this fact invariant to reclassifying the eurozone from being a group of 20 separate international locations, all pegged to one another, to a single entity. In our measurement, such a reclassification would merely shift some GDP-unit fixed-exchange price matches from being between international locations to being inside one. One other helpful function of our index is that it permits us to contemplate oblique fixed-exchange price relationships, eg the truth that, throughout the Bretton Woods period, peggers to the British pound had been additionally not directly pegged to the US greenback, given the previous anchoring to the latter. Lastly, a key distinctive function of our index is that it considers the truth that international locations which might be in a pegged relationship vis-à-vis some companions may properly be floating towards different companions.
Chart 1 compares our index to measures of the worldwide share of nations with fixed-exchange price regimes, with or with out GDP-weighting, which underly the conclusions of IRR.
Chart 1: Prevalence of fixed-exchange price preparations every now and then
Word: The chart compares the baseline index introduced in O’Rourke and Vicquéry (2025), encompassing all attainable ranks of oblique pegs, to a model of the identical index counting on direct pegs solely, and to combination measures of worldwide alternate price fixity analogous to those introduced in IRR (the share of nations with fixed-exchange price regimes, with and with out GDP weighting). A better worth signifies a higher prevalence of fixed-exchange charges.
Our baseline index exhibits a bigger shift from floating to fixing, in comparison with IRR-type measures, within the aftermath of WWII. That is pushed by oblique pegs, as anchor currencies turned pegged to at least one one other. Oblique pegs are essential in explaining the excessive stage of fixity throughout the Bretton Woods interval. Each forms of indices seize a decline in world alternate price fixity after President Nixon suspended the convertibility of the US greenback into gold in August 1971 – bringing to an finish a key facet of the Bretton Woods system – and a rise in fixity beginning within the Nineteen Nineties. Nonetheless, our index aligns with the view that versatile alternate price regimes have develop into extra prevalent for the reason that 1971 Nixon Shock. Presently, solely about 25% of GDP matches are pegged, versus round 75% throughout the Bretton Woods’s heyday, indicating that world alternate price fixity is now one third of what it was once earlier than 1971. This contrasts with IRR-style measures, which present that round 70% of worldwide alternate price regimes (near 50% on a GDP weighted foundation) have been constantly mounted for the reason that 2000s. Our index additionally exhibits the relevance of accounting for oblique pegs when assessing the evolution of alternate price preparations in current historical past. Evaluating variations of our index computed with or with out oblique peg hyperlinks exhibits that a lot of the post-Nixon Shock discontinuity may be accounted for by the truth that main anchor currencies stopped being pegged to at least one one other by way of US greenback anchoring.
Our index can be tweaked to have a look at a separate query: the prevalence of anchoring preparations to a sure forex, no matter whether or not alternate charges are mounted (for instance as a part of a managed float). Right here, we deal with anchoring to the US greenback. The character of the matches is on this case totally different as anchoring is uneven: whereas the UK may anchor to the US greenback, the other isn’t true, though anchoring may then lead to a symmetric pegging relationship between the US and the UK.
Chart 2: Prevalence of US greenback anchoring every now and then
Word: The chart compares the baseline index of US greenback anchoring introduced in O’Rourke and Vicquéry (2025), encompassing all attainable ranks of oblique anchoring, to a model of the identical index counting on direct anchoring relationships solely, and to combination measures of US greenback anchoring analogous to those introduced in IRR (the share of nations anchored to the US greenback with or with out GDP weighting). A better worth signifies a higher prevalence of US greenback anchoring.
Chart 2 once more contrasts our US greenback anchoring index, with or with out oblique linkages, to the share of nations anchored to the US greenback, with or with out GDP weighting. In step with the declare by IRR that greenback anchoring is by some metrics now larger than it was throughout the Bretton Woods period, the share of nations anchored to the greenback has elevated from round 40% previous to the Nixon Shock to greater than 50% right this moment. The GDP-weighted measure exhibits present ranges of greenback anchoring barely decrease (roughly 70%) than throughout the Bretton Woods peaks (roughly 80%). Our index, nonetheless, tells a special story. Contemplating solely direct anchoring, greenback anchoring declined from a peak of roughly 40% of GDP-unit matches to a secure stage of 20%–25% post-Bretton Woods. Together with oblique anchoring exhibits a halving of worldwide US greenback anchoring since Bretton Woods, from practically 100% of GDP-unit matches to round 50% right this moment. Curiously, the rise of greenback anchoring within the ‘concern of floating’ Nineteen Nineties is sort of fully pushed by oblique linkages, ie rising markets discovering themselves not directly anchored to the identical forex.
Our new measurement of worldwide alternate price fixity probably sheds new lights on different vital secular developments within the worldwide financial system, together with the dominant forex paradigm (Gopinath et al (2020)) and the worldwide monetary cycle (Miranda-Agrippino and Rey (2022)). For instance, the worldwide rise of dominant forex pricing (Boz et al (2022)) in addition to the decline of FX volatility amongst main currencies (Iltzetzki et al (2020)) for the reason that finish of Bretton Woods may be considered a partial substitute for declining alternate price fixity.
Roger Vicquéry works within the Financial institution’s International Evaluation Division and Kevin Hjortshøj O’Rourke is a Professor of Economics at Sciences Po and Directeur de Recherche on the CNRS.
If you wish to get in contact, please electronic mail us at bankunderground@bankofengland.co.uk or depart a remark beneath.
Feedback will solely seem as soon as accepted by a moderator, and are solely printed the place a full title is provided. Financial institution Underground is a weblog for Financial institution of England employees to share views that problem – or assist – prevailing coverage orthodoxies. The views expressed listed below are these of the authors, and will not be essentially these of the Financial institution of England, or its coverage committees.
Share the put up “How mounted are world alternate charges?”
