Sticky Exchange Rates and Flexible Prices: A Heretic View From the Interwar Period
December 1, 1991
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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.
Subject: Commodities, Exchange rate arrangements, Exchange rate flexibility, Exchange rates, Foreign exchange, Gold, Real exchange rates
Keywords: disequilibrium nominal exchange rate movement, Europe, exchange rate, Exchange rate arrangements, Exchange rate flexibility, Exchange rates, Gold, goods market, I. nominal exchange rate variability, market price, nominal exchange rate, price behavior, Real exchange rates, regime neutrality, series x, variability measure, WP
Pages:
74
Volume:
1991
DOI:
Issue:
124
Series:
Working Paper No. 1991/124
Stock No:
WPIEA1241991
ISBN:
9781451937855
ISSN:
1018-5941
Notes
Also published in Staff Papers, Vol. 39, No. 3, September 1992.
