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Abstract
The behavior of exchange rates during 1980 and the first half of 1981 reflected the fundamental problems of the international economy during this period. Continued divergences among rates of inflation and growth of real output in the industrial countries, as well as sizable changes in current account positions, contributed to sustained movements in exchange rates during the 18-month period ended in mid-1981. Viewed from a medium-term perspective of two to three years, exchange rates of industrial countries have generally moved in the direction suggested by the evolution of current account imbalances. During the period under review in this Report, however, short-run fluctuations in interest rate differentials between major industrial countries were much larger than in previous years and were associated with high short-run variability of bilateral exchange rates. The non-oil developing countries, which faced an especially difficult economic environment, had an important stake in maintaining exchange arrangements that would moderate the effects on them of exchange rate fluctuations among major currencies and in pursuing national exchange rate policies that would avoid a further weakening in current account positions already impaired by external circumstances. For oil exporting countries, too, exchange rate developments had an important role to play by affecting the competitiveness and profitability of the non-oil sector and hence the success of efforts to diversify production and exports. These topics of exchange rate behavior and international adjustment, as well as the important role of the Fund in surveillance over members’ exchange rate policies, are treated in the first part of this chapter.
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