In This Review

The Unloved Dollar Standard: From Bretton Woods to the Rise of China
The Unloved Dollar Standard: From Bretton Woods to the Rise of China
By Ronald I. McKinnon
Oxford University Press, USA, 2012, 240 pp
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In McKinnon’s view, the dollar-based international financial system has become fragile, due in part to U.S. policies. But it can be strengthened, McKinnon believes, especially with help from China. He argues that the conventional emphasis on adjusting exchange rates among currencies to reduce trade imbalances is deeply misguided and will not work without requiring significant changes in macroeconomic policies. More surprising, he believes that such changes can reduce trade imbalances without causing significant differences in exchange rates, the prospect of which can affect market expectations and destabilize cross-border flows of capital. He urges the U.S. Federal Reserve to pay more attention to stabilizing the dollar’s effective exchange rate and suggests that the U.S. government should stop pressing China for a major revaluation of the yuan. He also believes that Washington and Beijing should coordinate their efforts, with the Americans tightening their fiscal policy and the Chinese loosening theirs while also trying to increase domestic spending.