An alternative exchange regime

Comments on Ulrich Volz “A regional solution to global imbalances: We need a Beijing Accord”, 16/10/2010, http://www.eastasiaforum.org/2010/10/15/a-regional-solution-to-global-imbalances-we-need-a-beijing-accord/
While the dominant view on exchange rates in economic theories is the flexible regime, the regime has a fundamental weakness in terms of its inconsistency with the macroeconomic objective of price stability.

On the other hand, the fixed exchange rate regime in terms of one currency only like the $US has also its weakness when the $US is flexible with other main international currencies. It is moving with the $US against other currencies.

An alternative is to anchor a currency onto a basket of main international currencies. This will have some of the advantages of both the flexible and fixed exchange rate regimes. It is flexible with every of the main currencies that is anchored to and is fixed with the basket, that is the weighted currencies.

The best is with the the weights determined by a country's trade shares with those countries.

An alternative is to have an internationally recognised one, so that countries wish to anchor their currencies can do so. This international one should be based on a number of main trading nations, and its value against the main constituencies should be instantaneously be available just like a exchange market.

Another step in the alternative approach is to have a framework of adjustment mechanism if and when large international imbalances involving a country whose currency is anchored with those main currencies occur.