Economic Report of the President

coordinated use of stocks may forestall a surge in oil prices, but fewcountries would act individually to draw down their stocks if theythought that others would then exploit the opportunity to protect orincrease their own.Incomes PoliciesThe adoption of policies to influence directly the process of wageand price setting is another approach to improving economic performance.Elsewhere in this Report the possibilities as well as theproblems of implementing tax-based policies to encourage wage andprice restraint in the United States are discussed. The major foreigncountries do not now have formal incomes policies—though interestin using them has at various times been evident in several of them. Itdoes appear to be the case, however, that those countries with thegreatest downward flexibility in wage and price behavior, and hencealso the lowest inflation rates, have a stronger social consensus thanthose countries with higher inflation. Ironically, it may be that explicitincomes policies would be easiest to implement in those countrieswhere the implicit social consensus makes them least needed.MONETARY POLICY AND EXCHANGE RATESIn addition to the fundamental economic and social issues involvedin designing and carrying out sustained policies of demand restraintand supply enhancement, there are problems of a more technicalnature that must be dealt with. One of these, which has received agood bit of attention recently, arises from the interaction betweendomestic monetary policy and the foreign-exchange markets.If it is perceived that different countries, through their monetaryand fiscal policies, have significantly different objectives, especiallywith respect to inflation, then exchange rates are likely to move. Forinstance, if some countries use monetary policies aggressively toachieve a rapid decline in inflation while others pursue more expansionarypolicies that are judged likely to increase inflation, the currenciesof the former countries will tend to appreciate against thoseof the latter. Such exchange-rate adjustments are both unavoidableover the longer run and necessary to prevent the building up of distortionsin relative price levels across countries, so long as differentpolicy objectives persist.Exchange-rate adjustments do not always proceed smoothly, however.Exchange markets may at times become disorderly, and exchangerates may move more* sharply than necessary to accommodatedifferences in policies or in other fundamental economic variables.Such risks probably increase when the divergence in policy objectivesbecomes more marked and expectations about future economic performancecorrespondingly more diverse. Particularly when inflation198