Nevertheless, a rate might occasionally reach its limit and require official response. The initial instrument would be direct intervention in the foreign exchange market by the central banks. To assure credibility, however, participants would have to be prepared to alter their monetary policies to defend the ranges. In such instances, as Paul Volcker has argued persuasively for the United States, a country's long-term economic health would almost certainly be promoted rather than undermined by heeding the signal from the currency markets. With wide margins and credible national policies, however, the need actually to change monetary policy for currency reasons would probably be quite rare.
Similar considerations apply to the emerging market economies.
The Asians' dollar pegs led to substantial overvaluations and large trade deficits. They too should consider intermediate currency regimes, perhaps based on a common link to a trade-weighted basket of G7 currencies. Colombia, Chile and a number of other countries have used such systems successfully in the past. Hence I believe that the G-7, the IMF, and individual industrial and developing countries should all move toward adoption of target zones or similar regimes. I hope that this Committee will push the debate in this direction as it did so successfully in the 1960s.