Sticky Exchange Rates and Flexible Prices: A Heretic View From the Interwar Period
Summary:
Real exchange rate variability tends to be higher under flexible than under fixed exchange rates. The neokeynesian view attributes the higher variability to the combination of volatile nominal exchange rates with sticky prices. The neoclassical approach regards an increased incidence of real shocks as the culprit. We test the crucial assumptions underlying the two models for the interwar period. Prices and exchange rates are found to be equally flexible. We hence reject the neokeynesian sticky price view for our sample period. In contrast, our results are consistent with, while not constituting evidence for, the neoclassical equilibrium approach.
Series:
Working Paper No. 1991/124
Subject:
Commodities Exchange rate arrangements Exchange rate flexibility Exchange rates Foreign exchange Gold Real exchange rates
Notes:
Also published in Staff Papers, Vol. 39, No. 3, September 1992.
English
Publication Date:
December 1, 1991
ISBN/ISSN:
9781451937855/1018-5941
Stock No:
WPIEA1241991
Pages:
74
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