Buoyant Economies has developed a two exchange rate systems (the optimum exchange rate system and the guided exchange rate and liquidity system) in which the exchange rate is determined in the market without requiring international transactions to be quarantined from affecting the money supply.  These types of exchange rate mechanisms are sustainable in the long term and is likely to become the type of exchange rate mechanisms of the future. 

Some countries have already intervened in their foreign exchange market with the effect that foreign exchange transactions affect the money supply.  For example, Norway isolates its large revenues from oil from its exchange rate mechanism so that the oil does not drive the exchange rate too high for other businesses to compete in the world market.  The alternative exchange rate system avoids such problems as a normal part of the foreign exchange market that optimizes the exchange rate.        

This optimising and guided exchange rate systems are designed to provide more stable exchange rates than the traditional floating exchange rate.  International capital flows have minimal effect on the exchange rate. 

Also, these systems are designed to achieve government objectives such as full employment, high economic growth, balance of payments stability, low inflation etc.  The objectives can be changed to meet the requirements of each country.  Multiple objectives can be attained because there are a number of variables that can be used to attain those objectives (eg, exchange rate, interest rate, money supply, speed of change in exchange rate and money supply, etc).   

The equilibrium position for economies with these systems can be one of balance of payments stability with full employment and low inflation.  The interest rate is determined in the market to optimise international capital flows.  It is not used as an instrument for the central bank to control the economy.

The approach was derived from a mechanism developed for a small Pacific island country to maintain balance of payments stability.  The IMF commended the government for the success of the approach.  The country concerned had fixed exchange rates.  The optimum exchange rate system extends the system to include an exchange rate mechanism.  Details of the approach are discussed in the accompanying papers. 

   

Buoyant Economies is looking for countries interested in applying these new approaches to macro-economics.  The basic principles have already proved successful in a real economy.  Buoyant Economies is confident that the same principles can be applied effectively in other economies.

To consider some of the problems of the problems of the existing closed floating exchange rate system.

Click here to use a model to assess alternative exchange rate systems and policy options.