This paper outlines a possible design for an international exchange rate regime that minimizes the shortcomings of the current non-system – from floating to fixed regimes – and expands the policy space for currency-issuing governments in order to foster economic development. As such, this paper extends the theoretical body of Modern Monetary Theory by incorporating its principles in the design of an international exchange rate regime. The international exchange rate regime as proposed is designed as a rule-based managed float based on obligatory and symmetric forex interventions by cooperating central banks and thereby ensures that an agreed and rule-based nominal exchange rate target is realized at every point in time. The corresponding rule is that the nominal exchange rate adjusts according to the inflation rate differentials between the corresponding currency areas at a defined frequency. On top of that, it is recommended – though not obligatory – that countries establish a permanent zero interest rate policy and maintain or reintroduce their own national fiat currency to maximize their benefits from the international regime. Model-based comparisons show that the international regime outperforms the floating and fixed regimes in terms of level of investment and output respectively. The key comparative advantages of the international exchange rate regime are that it ensures stable real exchange rates, which both the floating and the fixed regimes fail to achieve, and greater policy space for fiat currency issuing governments, which is a major constraint in fixed exchange rate regimes.
Keywords: Exchange Rates, Modern Monetary Theory, Economic Development, Trade, Investment, Central Banking