Bank of England staff paper introduces GDP-based index of global exchange rate fixity and finds regimes are nearly three times more flexible than before the 1971 Nixon shock

The Bank of England published Staff Working Paper No. 1,131 proposing a new global index of exchange rate “fixity” and using it to reassess long-run trends in exchange rate regimes and anchor currencies. The authors conclude that, contrary to a “New Consensus” view of broad continuity since Bretton Woods, global exchange rate arrangements are now far more flexible, with today’s level of fixity around one third of that seen at the height of Bretton Woods, and with global anchoring to the US dollar less prevalent than during Bretton Woods once indirect links are accounted for. The index measures the probability that two randomly selected units of world GDP are produced under a fixed exchange rate relationship, capturing both direct and indirect pegs and remaining invariant to how the Eurozone is classified. Using Ilzetzki, Reinhart and Rogoff de facto regime and anchor classifications with GDP weights, the paper reports the index rising from about 0.35 in 1950 to around 0.75 in the 1960s, peaking at 0.78 in December 1970, then falling to 0.29 by summer 1973 and bottoming at 0.17 in December 1982 before fluctuating and stabilising around 0.25 in recent years. A companion anchoring measure suggests indirect dollar anchoring approached 100% of GDP-unit matches during Bretton Woods but is around 50% now, while pegged relationships today overwhelmingly reflect links to the US dollar. As a staff working paper, the publication is presented as research in progress intended to elicit comments and debate and does not represent Bank of England policy.