Eichengreen(1995) points out that"one of the more remarkable features of the last hundred years of international monetary experience is the regularity with which one regime(fixed and floating rates)has superseded the other. He sets out six explanations for this rotating dominance of exchange rate regime All are interesting and plausible and contribute to our understanding of the system. Our answer to this puzzle is that the system has not changed but the objectives for important blocs of countries within the system have changed over time. Fixed exchange rates and controlled financial markets work for twenty years and countries that follow this development strategy become an important periphery. These development policies are then overtaken by open financial markets and this, in turn, requires floating exchange rates. The Bretton Woods system does not evolve, it just occasionally reloads a periphery Bordo and Flandreau(2003) provide an excellent analysis of the link between financial development and the choice of exchange rate regime in the periphery. They also relate this choice to the debate on original sin, fear of floating and other recent topics related to economic policies in emerging markets. We are more concerned here about the effects of the periphery on the center For the most part, the reigning economic analysis of the system proceeds as if the periphery does not exist or is not important enough to affect the economies of the center countries. This is, we believe, a serious omission. To illustrate this point we focus below on the emerging current account deficit in the United States. In our framework, the US is once again the center country and, as such, plays by a different set of Where is the International Monetary System Driving Us? The recent weakness of the dollar against the euro seems consistent with the idea that the large and rising expected US current account deficits will become more difficult to finance as the net international investment position of the United States deteriorates. But if investors were becoming reluctant to invest in the US they would have to be rewarded with rising returns. Yet yields and spreads have generally been falling in the US not rising To explain this anomaly it is helpful to step back for a broad look at how the international monetary system has evolved. In general we know that the Us current account would have to adjust if the international monetary system consisted of floating currencies and open capital markets. But we do not live in such a world. We have re-entered a Bretton Woods reality and have to relearn and understand the very different djustment requirements for the center country in such a system emerging markets and Europe, which will face the most difficult macroeconomic challenges oing on ma o a The view of the world monetary order that we assemble here allows for strong conclusions about whe current global supply surpluses will be focused and how various participants will adjust to a very current account deficit in the center country. It especially allows us to understand what is goiEichengreen (1995) points out that “one of the more remarkable features of the last hundred years of international monetary experience is the regularity with which one regime (fixed and floating rates) has superseded the other.” He sets out six explanations for this rotating dominance of exchange rate regimes. All are interesting and plausible and contribute to our understanding of the system. Our answer to this puzzle is that the system has not changed but the objectives for important blocs of countries within the system have changed over time. Fixed exchange rates and controlled financial markets work for twenty years and countries that follow this development strategy become an important periphery. These development policies are then overtaken by open financial markets and this, in turn, requires floating exchange rates. The Bretton Woods system does not evolve, it just occasionally reloads a periphery. Bordo and Flandreau (2003) provide an excellent analysis of the link between financial development and the choice of exchange rate regime in the periphery. They also relate this choice to the debate on original sin, fear of floating and other recent topics related to economic policies in emerging markets. We are more concerned here about the effects of the periphery on the center. For the most part, the reigning economic analysis of the system proceeds as if the periphery does not exist or is not important enough to affect the economies of the center countries. This is, we believe, a serious omission. To illustrate this point we focus below on the emerging current account deficit in the United States. In our framework, the US is once again the center country and, as such, plays by a different set of rules. Where is the International Monetary System Driving Us? The recent weakness of the dollar against the euro seems consistent with the idea that the large and rising expected US current account deficits will become more difficult to finance as the net international investment position of the United States deteriorates. But if investors were becoming reluctant to invest in the US they would have to be rewarded with rising returns. Yet yields and spreads have generally been falling in the US, not rising. To explain this anomaly it is helpful to step back for a broad look at how the international monetary system has evolved. In general we know that the US current account would have to adjust if the international monetary system consisted of floating currencies and open capital markets. But we do not live in such a world. We have re-entered a Bretton Woods reality and have to relearn and understand the very different adjustment requirements for the center country in such a system. The view of the world monetary order that we assemble here allows for strong conclusions about where current global supply surpluses will be focused and how various participants will adjust to a very large current account deficit in the center country. It especially allows us to understand what is going on in the emerging markets and Europe, which will face the most difficult macroeconomic challenges