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 the direction of floating trade charges, the extent of this transition away from fastened preparations has been referred to as into query by a ‘New Consensus’ view. We offer a brand new index to measure trade fee fixity on the international degree, which restores the standard account of worldwide financial historical past over the past 70 years: in accordance with our measurement international trade fee 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 the direction of floating trade charges after the collapse of the Bretton Woods system in 1973. This shift was seen as extra suitable with open worldwide capital markets in comparison with the fastened trade fee regime that characterised the Bretton Woods period.

Nonetheless, this standard knowledge has been challenged by a ‘New Consensus’ view (Ilzetzki et al (2022)). Reinhart and Rogoff (2004) first launched classifications of trade fee regimes primarily based on precise trade fee behaviour reasonably than official declarations. They argued that when specializing in de facto reasonably than de jure trade fee preparations, post-1973 trade charges seem rather 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 international degree, by computing the share of nations with fixed-exchange fee regimes (with or with out GDP weighting), IRR posit a robust continuity in trade fee preparations from the Bretton Woods period to the current alongside two key dimensions. First, they argue that the prevalence of versatile trade fee preparations is barely marginally greater at the moment 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 important at the moment than it was through the Bretton Woods period. We revisit each conclusions in a current paper (O’Rourke and Vicquéry (2025)).

One mechanical motive why IRR discover greater shares of nations with fixed-exchange fee preparations, each in uncooked phrases and weighted by GDP, is the classification of eurozone members as having fixed-exchange charges. Their strategy is per the macroeconomic trilemma, ie particular person international locations throughout the eurozone have given up unbiased financial coverage, which permits them to attain a fixed-exchange fee alongside free capital flows. Nonetheless, 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 fee with the creation of the euro in January 1999, and that the euro space as an entire just isn’t a floating entity. There may be then a level of arbitrariness in indices of worldwide trade fee fixity that depend on such judgment calls. For instance, if the eurozone international locations have been to go a threshold of political integration for them to be thought of a single, floating entity, the measures of worldwide trade fee fixity underpinning the ‘New Consensus’ would shift discontinuously downward.

To deal with this concern, we introduce (O’Rourke and Vicquéry (2025)) a brand new methodology to combination country-level trade fee regime classifications: an index that displays the likelihood that two models of GDP, randomly chosen wherever on the earth, will come from international locations whose currencies are pegged towards one another. Such an index boils right down to computing the whole variety of GDP-unit matches involving both fixed-exchange charges or a standard foreign money (thus together with within-country matches), counting on the classification of IRR, and dividing this by the whole variety of potential GDP-unit matches worldwide. The index subsequently varies from 0 – a state of affairs the place every unit of worldwide GDP has its personal foreign money, all of which float towards one another – to 1, in which there’s a single world foreign money or a fixed-exchange fee regime encompassing all currencies.

Our index is subsequently 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 fee 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 fee relationships, eg the truth that, through the Bretton Woods period, peggers to the British pound have 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 properly be floating towards different companions.

Chart 1 compares our index to measures of the worldwide share of nations with fixed-exchange fee regimes, with or with out GDP-weighting, which underly the conclusions of IRR.

Chart 1: Prevalence of fixed-exchange fee preparations every now and then

Notice: The chart compares the baseline index offered in O’Rourke and Vicquéry (2025), encompassing all potential ranks of oblique pegs, to a model of the identical index counting on direct pegs solely, and to combination measures of worldwide trade fee fixity analogous to those offered in IRR (the share of nations with fixed-exchange fee regimes, with and with out GDP weighting). A better worth signifies a larger prevalence of fixed-exchange charges.

Our baseline index exhibits 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 grew to become pegged to 1 one other. Oblique pegs are essential in explaining the excessive degree of fixity through the Bretton Woods interval. Each kinds of indices seize a decline in international trade fee 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. Nonetheless, our index aligns with the view that versatile trade fee regimes have develop into extra prevalent for the reason that 1971 Nixon Shock. At the moment, solely about 25% of GDP matches are pegged, versus round 75% through the Bretton Woods’s heyday, indicating that international trade fee 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 trade fee regimes (near 50% on a GDP weighted foundation) have been persistently fastened for the reason that 2000s. Our index additionally exhibits the relevance of accounting for oblique pegs when assessing the evolution of trade fee preparations in current historical past. Evaluating variations of our index computed with or with out oblique peg hyperlinks exhibits that a lot of the post-Nixon Shock discontinuity could be accounted for by the truth that main anchor currencies stopped being pegged to 1 one other by way of US greenback anchoring.

Our index can be tweaked to take a look at a separate query: the prevalence of anchoring preparations to a sure foreign money, no matter whether or not trade charges are fastened (for instance as a part of a managed float). Right here, we concentrate on 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 other just isn’t true, though anchoring would possibly then end in a symmetric pegging relationship between the US and the UK.

Chart 2: Prevalence of US greenback anchoring every now and then

Notice: The chart compares the baseline index of US greenback anchoring offered in O’Rourke and Vicquéry (2025), encompassing all potential 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). A better 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. Per the declare by IRR that greenback anchoring is by some metrics now greater than it was through 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% at the moment. The GDP-weighted measure exhibits present ranges of greenback anchoring barely decrease (roughly 70%) than through the Bretton Woods peaks (roughly 80%). Our index, nonetheless, 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 exhibits a halving of worldwide US greenback anchoring since Bretton Woods, from practically 100% of GDP-unit matches to round 50% at the moment. 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 foreign money.

Our new measurement of worldwide trade fee fixity doubtlessly sheds new lights on different essential secular tendencies within the worldwide financial system, together with the dominant foreign money paradigm (Gopinath et al (2020)) and the worldwide monetary cycle (Miranda-Agrippino and Rey (2022)). For instance, the worldwide rise of dominant foreign money 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 could be considered a partial substitute for declining trade fee fixity.

Roger Vicquéry works within the Financial institution’s World 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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