s. assets, including u. s. bonds. in summary, i have argued today for an international system based on the principles of flexible exchange rates, free capital mobility, and independent monetary policies, at least within the great majority of countries. important complementary elements include free trade ( though i have not discussed it today ) and the further development of the “ soft ” infrastructure - the legal, regulatory, fiscal, and financial frameworks that characterize advanced economies. the fundamental virtue of this system is its flexibility and adaptability, qualities that will become increasingly essential in a complex and interdependent world.

exchange rate movements, because of their influence on domestic prices. this behavior does not imply that exchange rate stabilization is an independent objective, however ; and should price stability and exchange rate stability come into conflict, it is the latter that should be jettisoned. in contrast to floating rates, fixed exchange rates - rather than being a mechanism for reducing macroeconomic instability - have often been a source of instability. historically, governments have often defended their fixed parity even after the overvaluation of the exchange rate became obvious, leading to losses of foreign exchange reserves, a balance of payments crisis, and difficult domestic adjustments. some observers have suggested that the solution to this problem is to tie the government ’ s hands even more forcefully by imposing a harder peg, by means of a currency board or dollarization for example. but market participants know that promises to maintain a fixed rate are almost never irrevocable, and so a speculative attack is always possible ( as argentina recently learned, for example ). another strategy for deterring speculative attacks on a fixed exchange rate is to build a “ war chest ” of foreign - currency reserves. to be effective in today ’ s world of highly mobile capital, the war chest may have to be sizable indeed ; and for countries with large government debts and high domestic interest rates, holding great quantities of low - yielding reserves can have serious fiscal consequences. in any case, strategies to increase the defensibility of the peg ignore the broader issue of the role of the exchange rate in macroeconomic adjustment. for an individual country, forcing adjustment to a mis - valued exchange rate through domestic price changes is likely to be far more difficult and costly than an adjustment occurring through exchange rate depreciation or appreciation. for the world as a whole, macroeconomic adjustment may likewise be impeded if economically important countries attempt to maintain pegs at levels that differ from those dictated by fundamentals. if fixed exchange rates bear such risks, what explains their continued existence? one traditional argument in favor of fixed exchange rates for developing countries focuses on their usefulness in so - called heterodox programs for overcoming high inflation. 8 according to this view, the advantage of fixing the exchange rate as one element of an anti - inflation program ( along with fiscal reforms and other policy changes ) is that fixing the rate is more visible, more credible, and easier to explain than a commitment to stabilizing prices directly. even if we grant a role for a fixed exchange rate in combating high inflation, however