The system was designed to ensure a world of full employment and economic growth.
Exchange rates are assumed to reveal fundamental supply as well as demand conditions, which, sequentially, ought to be associated to fundamental macroeconomic and other primary factors. Undeniably, the academic literature offers constructive confirmation of the relationship between exchange rates and basics in the long term. Nonetheless, exchange rates frequently diverge considerably from values implied by fundamentals and equality conditions in the short term, even in well-functioning markets (Sarno and Taylor, 2002).
The cut off between short-term exchange rate levels as well as macroeconomic basics may make a position for sterilized involvement, which affects the exchange rate mostly through its impact on prospect, risk premiums, as well as order flow. Especially, sterilized intervention can be used to stop unnecessary exchange rate movements resulting from short-term shocks that do not influence fundamental macroeconomic conditions. For economies experiencing macroeconomic imbalances or structural weaknesses, intervention can assist for the time being effortlessness exchange rate pressures merely if there is a reliable commitment to, and tangible progress on, macroeconomic as well as structural adjustments.
A crucial element in international monetary reform is improvement in the balance of payments adjustment process. There is widespread agreement that this improvement requires more flexible exchange rates than under the Bretton Woods system, and the Jamaica agreement legitimizes flexible rates. Yet there have been objections that greater exchange rate flexibility will be detrimental to the less developed countries, as well as claims that the LDCs have already been injured by the Smithsonian realignment of exchange rates in December 1971, the February 1973 dollar devaluation, and the floating of major currencies thereafter.
The IMF annual report specifically cited exchange market development as a major new cost that LDCs would have to bear under a system of flexible rates for industrial countries. However, the importance of this problem seems to have been exaggerated. Most LDC export and import contracts have traditionally been specified in the major foreign currencies, not in a local currency. To the extent that LDC traders wished to hedge against new relative movements of these foreign currencies, they could do so through established forward exchange markets in the financial centers of industrial countries. The absence in LDCs of forward exchange markets for this purpose therefore appears to be of little concern.
When it is important to have local currency quotations for certain export and import contracts, the problem is one of forward cover not among currencies of developed countries but between a specific foreign currency and the domestic currency of the LDC. In this case new forward markets would undoubtedly be