In recent years, there has been growing dissatisfaction with the performance of floating exchange rates. The experience of excessive exchange-rate volatility, prolonged misalignments and persistent and large current imbalances has led to renewed interest in issues of international macro-economic policy coordination in general, and of exchange-rate targets or zones in particular. This has been reflected in the burgeoning research literature concerned with issues of policy coordination. It has also been reflected in the growing interest in economic policy coordination amongst policy-makers. The Plaza Agreement of September 1985 saw the first practical step in this direction with agreement on coordinated exchange market intervention. The Tokyo Summit of May 1986 and the Venice Summit of June 1987 approved the concept of using a set of ‘indicators’ as a framework for policy coordination, but failed to articulate how an indicator system would operate in practice. What is required is a set of rules or guidelines for the conduct of macropolicy which are consistent with the objectives of national governments but which avoid the type of policy conflict that can arise if countries pursue independently determined policies.

The best articulated and most prominent proposal for policy coordination is the extended target zone arrangement, put forward by John Williamson. This envisages a set of mutually consistent wide target zones for real exchange rates, pursued primarily by means of monetary policy; with nominal income targets, pursued primarily by fiscal policy, providing a supporting domestic policy. This proposal is analysed in detail in Williamson and Miller (1987).