The International Monetary Fund has been calling for a concerted effort to reduce global current account imbalances. This will require an increase in saving in the US and an increase in demand outside the US. One element helping to increase demand from emerging Asian economies will be greater exchange rate flexibility.

Michael Dooley, David Folkerts-Landau, and Peter Garber suggest the imbalances reflect a conscious and stable arrangement between surplus and deficit countries - a "New Bretton Woods" system*. An undervalued nominal peg to the dollar is a perfectly reasonable arrangement, and calls for changes are misplaced, they say. Such arguments are rapidly gaining influence. But do they hold up under scrutiny? We think not.