Bretton Woods II

Bretton Woods II is an informal designation for the system of currency relations which developed during the 2000s. As described by political economist Daniel Drezner, "Under this system, the U.S. is running massive current account deficits to be the source of export-led growth for other countries. To fund this deficit, central banks, particularly those on the Pacific Rim, are buying up dollars and dollar-denominated assets." [cite web
url=http://www.danieldrezner.com/archives/001912.html
title=How Stable Is Bretton Woods 2?
author=Daniel Drezner
date=February 24, 2005 ] The name refers to the Bretton Woods system of monetary management which was instituted after World War II, but unlike its predecessor, Bretton Woods II is not founded on any formal agreements.

History of the concept

The notion of a "revived Bretton Woods system" was introduced in a 2003 paper by Dooley, Folkerts-Landau, and Garber, in which it is described as arising after the end of the Cold War, out of the choice of countries, quote|mainly in Asia, [which] chose the same periphery strategy as immediate post-war Europe and Japan, undervaluing the exchange rate, managing sizable foreign exchange interventions, imposing controls, accumulating reserves, and encouraging export-led growth by sending goods to the competitive center countries. [cite web
url=http://www.nber.org/papers/w9971
title=An Essay on the Revived Bretton Woods System
author= Michael P. Dooley, David Folkerts-Landau, Peter Garber
publisher=National Bureau of Economic Research
date=September 2003]

In 2005, Roubini and Setser argued that the system is unsustainable: quote|If the US does not take policy steps to reduce its need for external financing before it exhausts the world’s central banks willingness to keep adding to their dollar reserves – and if the rest of the world does not take steps to reduce its dependence on an unsustainable expansion in US domestic demand to support its own growth – the risk of a hard landing for the US and global economy will grow. The basic outlines of a hard landing are easy to envision: a sharp fall in the value of the US dollar, a rapid increase in US long-term interest rates and a sharp fall in the price of a range of risk assets including equities and housing. The asset price adjustment would lead to a severe slowdown in the US, and the fall in US imports associated with the US slowdown and the dollar’s fall would lead to a global severe economic slowdown, if not an outright recession. [cite web
url=http://www.stern.nyu.edu/~nroubini/papers/BW2-Unraveling-Roubini-Setser.pdf
title=Will the Bretton Woods 2 Regime Unravel Soon? The Risk of a Hard Landing in 2005-2006
author= Nouriel Roubini, Brad Setser
date=February 2005]

ee also

*Foreign exchange reserves
*Exchange rate regime

References