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, the former US Federal Reserve chairman, has argued for the US, 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 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. G7 officials will meet this weekend in Washington to discuss the international financial architecture.