These insights lead me to ask the following question: do freely floating exchange rates along with largely unrestricted capital flows still provide the basis for a well-functioning international monetary system? I don’t intend to provide an answer today.
I know very well that when it comes to the Marshall-Lerner elasticities, the devil lies in the econometric details, and I acknowledge that exchange rate adjustment has served us well in many instances, allowing monetary policies to adjust to national circumstances. Neither do I underestimate the difficulties in a world of nation-states of altering the parameters of the current system.