Protectionism and the case for flexible exchange rates: A reexamination

This paper reexamines the arguments by early proponents that flexible exchange rates would lessen the incentives for protectionism and also permit countries to pursue independent monetary policies. We argue that there is a basic inconsistency between these two arguments; the pursuit of independent monetary policy can lead to situations which involve very strong pressures on policy-makers to engage in protection. A theoretical analysis supporting our argument is developed, and some circumstantial evidence is presented.