- Alt-M - http://www.alt-m.org -

Daylight savings time and floating exchange rates

Today the United States switched from daylight savings time to standard time. Europe has already done so, as Lars Christensen noted in a recent post. Lars used the occasion, as I will, to bring up Milton Friedman's analogy between daylight savings time and floating exchange rates in  Friedman's essay "The Case for Flexible Exchange Rates" (written in 1950 and published in 1953). Lars used the analogy to discuss nominal GDP targeting. I will use it to discuss its original subject. Friedman contends that instead of changing schedules in the summertime, it is easier for everybody to change the time and keep the same nominal schedules as before. Similarly, he contends that instead of changing many nominal prices, it is easier to change the nominal exchange rate and keep nominal prices the same.

It is unclear whether daylight savings time actually has much benefit. In countries that have it, though, people only change their clocks twice a year. What would it be like if they had to change their clocks twice each minute, which is how fast exchange rates sometimes change? I am aware of no free banking system that has ever had a floating exchange rate as a permanent feature rather than as a temporary expedient. Of course, that was in a context where fixed or pegged exchange rates were almost universally viewed as the norm. Things might be different were free banking to return today. I remain skeptical, though.