adjustment instead. since the collapse of the bretton woods system, we have seen the emergence of a diverse range of exchange rate arrangements. the large industrial economies have, by and large, decided to let their currencies adjust to changing circumstances without official intervention in exchange markets. japan aside, it is now close to seven years since the last episode of concerted intervention among the major economies ; and there has been no japanese intervention for two years. among emerging economies, too, we have seen a marked trend toward more flexible exchange rate regimes. this is particularly pronounced in parts of latin america. at the other end of the spectrum, some of the newer members of the european union are gearing up to adopt the euro. somewhere in the middle between these extremes of flexible exchange rate regimes and full monetary integration are the emerging market economies, mostly in asia and among the major oil exporters in the gulf, that still sustain fixed or partially fixed exchange rate regimes. most of these countries link their currencies to the dollar, though we see varying degrees of flexibility in the closeness of that link. how has the world fared under this diverse mixed of flexible and fixed exchange rate regimes? in general, i think, the costs of living with exchange rate volatility have been less than feared and attempts to limit volatility have been more damaging and less effective than expected. take the experience of the major economies. despite periods of very substantial swings in exchange rates, and the amplitude of the changes in exchange rates among the major currencies since 1973 have been exceptionally large, economic growth in the major economies have become more stable, not less. quarterly gdp volatility in the united states, for example, has fallen by more than half since the mid 1980s. and average rates of inflation and the variability of inflation outcomes have of course declined substantially as well. this is not to say that these swings in exchange rates have not come with pain and trauma, only that overall economic performance has fared better than many would have expected three decades ago when contemplating life under flexible exchange rates. among emerging markets, experience with exchange rate flexibility has been more limited, and the record has been more mixed. chile probably has one of the longest record of successful performance under a flexible regime, success due in large part of course to a strong record of prudent macroeconomic policy management and strong institutions. but there are many more examples today – brazil and mexico are two – of emerging economies with sustained periods of improved growth and

timothy f geithner : reflections on the changing global economy remarks by mr timothy f geithner, president and chief executive officer of the federal reserve bank of new york, at the 46th aci financial markets association world congress, montreal, quebec, 4 may 2007. * * * good morning. i am pleased to be able to join you today. and it is a privilege to be here today with canada's accomplished central bank governor, david dodge. there are few people in central banks or in governments around the world today that have presided over as far reaching and successful a set of macroeconomic policy reforms as has david dodge. i want to offer some reflections about the challenges managing macroeconomic policy in a more open and integrated world economy. and i want to say something about how the international monetary system, and the current framework of exchange rate regimes, might develop in the coming years. for the past century or more, choices about exchange rate regimes have played an important role in economic outcomes across countries. from the gold standard of the late 19th and early 20th centuries through the bretton woods system and the episodes of exchange rate cooperation among the g5 and the g7 in the 1980s and after, the desire to achieve exchange rate stability was a major preoccupation of policymakers. the economic damage inflicted by the disastrous competitive devaluations among the major economies in the 1930s had a profound influence on thinking during much of the postwar period. and for governments and enterprises around the world today, the aversion to large fluctuations in exchange rates remains strong. as the world has become more open to trade and more closely integrated, this sensitivity to exchange rate variability has intensified. and yet, experience suggests that resisting variability makes the adjustment to changing economic conditions more painful. in an increasingly open world economy, the ability to cope with change becomes more important, and for a large fraction of the world economic, exchange rate flexibility is a necessary condition for sustained favorable economic performance. changes in fundamental factors such as productivity growth and the inevitable shocks to demand and supply require changes in relative prices, both domestically and internationally. a flexible exchange rate regime makes it easier for relative prices to move rapidly and effectively in the appropriate direction, and this generally eases the cost of that adjustment. even in a fixed rate regime, this adjustment in response to changing circumstances will ultimately have to take place, of course. but if relative prices cannot adjust through the exchange rate, domestic output and employment will have to bear the brunt of