Roger Vicquéry and Kevin Hjortshøj O’Rourke
Whereas the collapse of the Bretton Woods system in 1973 has historically been seen as heralding a significant shift in direction of floating change charges, the extent of this transition away from fastened preparations has been known as into query by a ‘New Consensus’ view. We offer a brand new index to measure change charge fixity on the world degree, which restores the standard account of worldwide financial historical past over the past 70 years: in line with our measurement world change charge fixity is now solely a couple of third of its Bretton Woods degree. We spotlight how this transition to floating preparations was largely pushed by anchor currencies ceasing to be pegged to 1 one other.
The usual narrative of the modern evolution of the worldwide financial system, usually framed throughout the context of the worldwide macroeconomic trilemma (Obstfeld et al (2005)), means that the world transitioned decisively in direction of floating change charges after the collapse of the Bretton Woods system in 1973. This shift was seen as extra appropriate with open worldwide capital markets in comparison with the fastened change charge regime that characterised the Bretton Woods period.
Nevertheless, this standard knowledge has been challenged by a ‘New Consensus’ view (Ilzetzki et al (2022)). Reinhart and Rogoff (2004) first launched classifications of change charge regimes based mostly on precise change charge behaviour quite than official declarations. They argued that when specializing in de facto quite than de jure change charge preparations, post-1973 change charges seem way more fastened than beforehand thought. Ilzetzki, Reinhart and Rogoff (2019), henceforth IRR, prolonged and up to date the unique country-level classification. When aggregating up country-level classifications on the world degree, by computing the share of nations with fixed-exchange charge regimes (with or with out GDP weighting), IRR posit a robust continuity in change charge preparations from the Bretton Woods period to the current alongside two key dimensions. First, they argue that the prevalence of versatile change charge preparations is just marginally greater as we speak than it was earlier than 1973. Second, they contend that the US greenback’s position as a financial anchor is as prevalent and, by some metrics, extra vital as we speak than it was in the course of the Bretton Woods period. We revisit each conclusions in a current paper (O’Rourke and Vicquéry (2025)).
One mechanical purpose why IRR discover greater shares of nations with fixed-exchange charge preparations, each in uncooked phrases and weighted by GDP, is the classification of eurozone members as having fixed-exchange charges. Their strategy is in step with the macroeconomic trilemma, ie particular person international locations throughout the eurozone have given up impartial financial coverage, which permits them to attain a fixed-exchange charge alongside free capital flows. Nevertheless, it contrasts with the Worldwide Financial Fund’s classification of those international locations as floaters. Whereas it’s tough to argue that international locations like Eire or Portugal have floating currencies, so is to think about that Germany moved from a versatile to a fixed-exchange charge with the creation of the euro in January 1999, and that the euro space as a complete is just not a floating entity. There may be then a level of arbitrariness in indices of worldwide change charge fixity that depend on such judgment calls. For instance, if the eurozone international locations had been to go a threshold of political integration for them to be thought-about a single, floating entity, the measures of worldwide change charge fixity underpinning the ‘New Consensus’ would shift discontinuously downward.
To deal with this concern, we introduce (O’Rourke and Vicquéry (2025)) a brand new technique to combination country-level change charge regime classifications: an index that displays the chance that two items of GDP, randomly chosen anyplace on the planet, will come from international locations whose currencies are pegged in opposition to one another. Such an index boils right down to computing the full variety of GDP-unit matches involving both fixed-exchange charges or a standard forex (thus together with within-country matches), counting on the classification of IRR, and dividing this by the full variety of attainable GDP-unit matches worldwide. The index due to this fact varies from 0 – a state of affairs the place every unit of worldwide GDP has its personal forex, all of which float in opposition to one another – to 1, in which there’s a single world forex or a fixed-exchange charge regime encompassing all currencies.
Our index is due to this fact invariant to reclassifying the eurozone from being a set of 20 separate international locations, all pegged to one another, to a single entity. In our measurement, such a reclassification would merely shift some GDP-unit fixed-exchange charge matches from being between international locations to being inside one. One other helpful characteristic of our index is that it permits us to think about oblique fixed-exchange charge relationships, eg the truth that, in the course of the Bretton Woods period, peggers to the British pound had been additionally not directly pegged to the US greenback, given the previous anchoring to the latter. Lastly, a key distinctive characteristic of our index is that it considers the truth that international locations which might be in a pegged relationship vis-à-vis some companions would possibly effectively be floating in opposition to different companions.
Chart 1 compares our index to measures of the worldwide share of nations with fixed-exchange charge regimes, with or with out GDP-weighting, which underly the conclusions of IRR.
Chart 1: Prevalence of fixed-exchange charge preparations from time to time
Observe: The chart compares the baseline index offered in O’Rourke and Vicquéry (2025), encompassing all attainable ranks of oblique pegs, to a model of the identical index counting on direct pegs solely, and to combination measures of worldwide change charge fixity analogous to those offered in IRR (the share of nations with fixed-exchange charge regimes, with and with out GDP weighting). The next worth signifies a larger prevalence of fixed-exchange charges.
Our baseline index reveals a bigger shift from floating to fixing, in comparison with IRR-type measures, within the aftermath of WWII. That is pushed by oblique pegs, as anchor currencies turned pegged to 1 one other. Oblique pegs are essential in explaining the excessive degree of fixity in the course of the Bretton Woods interval. Each varieties of indices seize a decline in world change charge fixity after President Nixon suspended the convertibility of the US greenback into gold in August 1971 – bringing to an finish a key side of the Bretton Woods system – and a rise in fixity beginning within the Nineties. Nevertheless, our index aligns with the view that versatile change charge regimes have develop into extra prevalent for the reason that 1971 Nixon Shock. At present, solely about 25% of GDP matches are pegged, versus round 75% in the course of the Bretton Woods’s heyday, indicating that world change charge fixity is now one third of what it was once earlier than 1971. This contrasts with IRR-style measures, which present that round 70% of worldwide change charge regimes (near 50% on a GDP weighted foundation) have been constantly fastened for the reason that 2000s. Our index additionally reveals the relevance of accounting for oblique pegs when assessing the evolution of change charge preparations in current historical past. Evaluating variations of our index computed with or with out oblique peg hyperlinks reveals that a lot of the post-Nixon Shock discontinuity might be accounted for by the truth that main anchor currencies stopped being pegged to 1 one other through US greenback anchoring.
Our index can be tweaked to have a look at a separate query: the prevalence of anchoring preparations to a sure forex, no matter whether or not change charges are fastened (for instance as a part of a managed float). Right here, we give attention to anchoring to the US greenback. The character of the matches is on this case completely different as anchoring is uneven: whereas the UK would possibly anchor to the US greenback, the alternative is just not true, though anchoring would possibly then lead to a symmetric pegging relationship between the US and the UK.
Chart 2: Prevalence of US greenback anchoring from time to time
Observe: The chart compares the baseline index of US greenback anchoring offered in O’Rourke and Vicquéry (2025), encompassing all attainable ranks of oblique anchoring, to a model of the identical index counting on direct anchoring relationships solely, and to combination measures of US greenback anchoring analogous to those offered in IRR (the share of nations anchored to the US greenback with or with out GDP weighting). The next worth signifies a larger prevalence of US greenback anchoring.
Chart 2 once more contrasts our US greenback anchoring index, with or with out oblique linkages, to the share of nations anchored to the US greenback, with or with out GDP weighting. In step with the declare by IRR that greenback anchoring is by some metrics now greater than it was in the course of the Bretton Woods period, the share of nations anchored to the greenback has elevated from round 40% previous to the Nixon Shock to greater than 50% as we speak. The GDP-weighted measure reveals present ranges of greenback anchoring barely decrease (roughly 70%) than in the course of the Bretton Woods peaks (roughly 80%). Our index, nevertheless, tells a special story. Contemplating solely direct anchoring, greenback anchoring declined from a peak of roughly 40% of GDP-unit matches to a steady degree of 20%–25% post-Bretton Woods. Together with oblique anchoring reveals a halving of worldwide US greenback anchoring since Bretton Woods, from practically 100% of GDP-unit matches to round 50% as we speak. Apparently, the rise of greenback anchoring within the ‘worry of floating’ Nineties is nearly completely pushed by oblique linkages, ie rising markets discovering themselves not directly anchored to the identical forex.
Our new measurement of worldwide change charge fixity doubtlessly sheds new lights on different essential secular developments within the worldwide financial system, together with the dominant forex paradigm (Gopinath et al (2020)) and the worldwide monetary cycle (Miranda-Agrippino and Rey (2022)). For instance, the worldwide rise of dominant forex pricing (Boz et al (2022)) in addition to the decline of FX volatility amongst main currencies (Iltzetzki et al (2020)) for the reason that finish of Bretton Woods might be regarded as a partial substitute for declining change charge fixity.
Roger Vicquéry works within the Financial institution’s International Evaluation Division and Kevin Hjortshøj O’Rourke is a Professor of Economics at Sciences Po and Directeur de Recherche on the CNRS.
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