Roger Vicquéry and Kevin Hjortshøj O’Rourke
Whereas the collapse of the Bretton Woods system in 1973 has historically been seen as heralding a serious shift in direction of floating alternate charges, the extent of this transition away from fastened preparations has been referred to as into query by a ‘New Consensus’ view. We offer a brand new index to measure alternate charge fixity on the international stage, which restores the standard account of worldwide financial historical past over the past 70 years: in keeping with our measurement international alternate charge fixity is now solely a few 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 1 one other.
The usual narrative of the modern evolution of the worldwide financial system, usually framed throughout the context of the worldwide macroeconomic trilemma (Obstfeld et al (2005)), means that the world transitioned decisively in 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 fastened alternate charge regime that characterised the Bretton Woods period.
Nevertheless, this typical knowledge has been challenged by a ‘New Consensus’ view (Ilzetzki et al (2022)). Reinhart and Rogoff (2004) first launched classifications of alternate charge regimes based mostly on precise alternate charge behaviour relatively than official declarations. They argued that when specializing in de facto relatively than de jure alternate charge preparations, post-1973 alternate charges seem rather more fastened 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 international stage, by computing the share of nations with fixed-exchange charge regimes (with or with out GDP weighting), IRR posit a powerful continuity in alternate charge preparations from the Bretton Woods period to the current alongside two key dimensions. First, they argue that the prevalence of versatile alternate charge preparations is simply marginally increased as we speak 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 as we speak than it was in the course of the Bretton Woods period. We revisit each conclusions in a current paper (O’Rourke and Vicquéry (2025)).
One mechanical motive why IRR discover increased shares of nations with fixed-exchange charge preparations, each in uncooked phrases and weighted by GDP, is the classification of eurozone members as having fixed-exchange charges. Their strategy is in step with the macroeconomic trilemma, ie particular person nations throughout the eurozone have given up impartial financial coverage, which permits them to attain a fixed-exchange charge alongside free capital flows. Nevertheless, it contrasts with the Worldwide Financial Fund’s classification of those nations as floaters. Whereas it’s troublesome to argue that nations like Eire or Portugal have floating currencies, so is to contemplate that Germany moved from a versatile to a fixed-exchange charge with the creation of the euro in January 1999, and that the euro space as a complete is just not a floating entity. There may be then a level of arbitrariness in indices of worldwide alternate charge fixity that depend on such judgment calls. For instance, if the eurozone nations had been to cross a threshold of political integration for them to be thought of a single, floating entity, the measures of worldwide alternate charge fixity underpinning the ‘New Consensus’ would shift discontinuously downward.
To deal with this challenge, we introduce (O’Rourke and Vicquéry (2025)) a brand new methodology to combination country-level alternate charge regime classifications: an index that displays the chance that two items of GDP, randomly chosen wherever on this planet, will come from nations whose currencies are pegged in opposition to one another. Such an index boils right down to computing the whole variety of GDP-unit matches involving both fixed-exchange charges or a standard foreign money (thus together with within-country matches), counting on the classification of IRR, and dividing this by the whole variety of doable 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 foreign money, all of which float in opposition to one another – to 1, in which there’s a single world foreign money or a fixed-exchange charge regime encompassing all currencies.
Our index is due to this fact invariant to reclassifying the eurozone from being a set of 20 separate nations, all pegged to one another, to a single entity. In our measurement, such a reclassification would merely shift some GDP-unit fixed-exchange charge matches from being between nations to being inside one. One other helpful characteristic of our index is that it permits us to contemplate oblique fixed-exchange charge relationships, eg the truth that, in the course of 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 characteristic of our index is that it considers the truth that nations which might be in a pegged relationship vis-à-vis some companions may properly be floating in opposition to different companions.
Chart 1 compares our index to measures of the worldwide share of nations with fixed-exchange charge regimes, with or with out GDP-weighting, which underly the conclusions of IRR.
Chart 1: Prevalence of fixed-exchange charge preparations from time to time
Notice: The chart compares the baseline index introduced in O’Rourke and Vicquéry (2025), encompassing all doable ranks of oblique pegs, to a model of the identical index counting on direct pegs solely, and to combination measures of worldwide alternate charge fixity analogous to those introduced in IRR (the share of nations with fixed-exchange charge regimes, with and with out GDP weighting). A better worth signifies a better prevalence of fixed-exchange charges.
Our baseline index reveals 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 grew to become pegged to 1 one other. Oblique pegs are essential in explaining the excessive stage of fixity in the course of the Bretton Woods interval. Each varieties of indices seize a decline in international alternate charge 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. Nevertheless, our index aligns with the view that versatile alternate charge regimes have grow to be extra prevalent because the 1971 Nixon Shock. At present, solely about 25% of GDP matches are pegged, versus round 75% in the course of the Bretton Woods’s heyday, indicating that international alternate charge fixity is now one third of what it was earlier than 1971. This contrasts with IRR-style measures, which present that round 70% of worldwide alternate charge regimes (near 50% on a GDP weighted foundation) have been constantly fastened because the 2000s. Our index additionally reveals the relevance of accounting for oblique pegs when assessing the evolution of alternate charge preparations in current historical past. Evaluating variations of our index computed with or with out oblique peg hyperlinks reveals that a lot of the post-Nixon Shock discontinuity could be accounted for by the truth that main anchor currencies stopped being pegged to 1 one other by way of US greenback anchoring.
Our index may also be tweaked to take a look at a separate query: the prevalence of anchoring preparations to a sure foreign money, no matter whether or not alternate charges are fastened (for instance as a part of a managed float). Right here, we give attention to 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 is just not true, though anchoring may then lead to a symmetric pegging relationship between the US and the UK.
Chart 2: Prevalence of US greenback anchoring from time to time
Notice: The chart compares the baseline index of US greenback anchoring introduced in O’Rourke and Vicquéry (2025), encompassing all doable 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 better 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 keeping with the declare by IRR that greenback anchoring is by some metrics now increased than it was in the course of 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% as we speak. The GDP-weighted measure reveals present ranges of greenback anchoring barely decrease (roughly 70%) than in the course of the Bretton Woods peaks (roughly 80%). Our index, nonetheless, tells a distinct story. Contemplating solely direct anchoring, greenback anchoring declined from a peak of roughly 40% of GDP-unit matches to a steady stage of 20%–25% post-Bretton Woods. Together with oblique anchoring reveals a halving of worldwide US greenback anchoring since Bretton Woods, from almost 100% of GDP-unit matches to round 50% as we speak. Curiously, the rise of greenback anchoring within the ‘worry of floating’ Nineteen Nineties is sort of completely pushed by oblique linkages, ie rising markets discovering themselves not directly anchored to the identical foreign money.
Our new measurement of worldwide alternate charge fixity probably sheds new lights on different vital secular traits within the worldwide financial system, together with the dominant foreign money paradigm (Gopinath et al (2020)) and the worldwide monetary cycle (Miranda-Agrippino and Rey (2022)). For instance, the worldwide rise of dominant foreign money pricing (Boz et al (2022)) in addition to the decline of FX volatility amongst main currencies (Iltzetzki et al (2020)) because the finish of Bretton Woods could be considered a partial substitute for declining alternate charge fixity.
Roger Vicquéry works within the Financial institution’s World Evaluation Division and Kevin Hjortshøj O’Rourke is a Professor of Economics at Sciences Po and Directeur de Recherche on the CNRS.
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