Sticky Exchange Rates and Flexible Prices: A Heretic View From the Interwar Period

IMF Working Papers, December 1, 1991

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Sticky Exchange Rates and Flexible Prices: A Heretic View From the Interwar Period

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Bibliographic details

• Authors: Anne Marie Gulde, Holger C. Wolf
• Published: December 1, 1991
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781451937855.001

Core finding

• Real exchange rate variability tends to be higher under flexible than under fixed exchange rates.
• The authors test the competing explanations for this fact for the interwar period:
  • Neokeynesian view: higher variability arises from volatile nominal exchange rates combined with sticky prices.
  • Neoclassical view: higher variability reflects an increased incidence of real shocks.
• Empirical result: prices and exchange rates are found to be equally flexible for the sample period.
• Conclusion: the neokeynesian sticky price view is rejected for the sample period; results are consistent with, but do not constitute evidence for, the neoclassical equilibrium approach.

Methodological focus and assumptions tested

• The paper explicitly tests the crucial assumptions underlying the neokeynesian and neoclassical models as they apply to the interwar period.
• The comparison centers on relative flexibility of prices versus exchange rates and on the incidence of real shocks versus nominal variability.

Implications and interpretation

• Rejection of the sticky-price (neokeynesian) explanation for the interwar sample implies that nominal exchange rate volatility combined with price stickiness does not account for higher real exchange rate variability in this context.
• Consistency with the neoclassical equilibrium approach suggests real shocks may better explain the observed variability, though the authors caution that their results do not constitute direct evidence proving the neoclassical hypothesis.

Publication and metadata

• Authors: Anne Marie Gulde, Holger C. Wolf
• Publication date: December 1, 1991
• Also published in: Staff Papers, Vol. 39, No. 3, September 1992.
• Series: Working Paper No. 1991/124
• Issue: 124
• Volume: 1991
• Pages: 74
• DOI: https://doi.org/10.5089/9781451937855.001
• ISBN: 9781451937855
• ISSN: 1018-5941

Subjects and keywords

• 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

Content summarized from IMF Working Paper "Sticky Exchange Rates and Flexible Prices: A Heretic View From the Interwar Period" by Anne Marie Gulde and Holger C. Wolf (Working Paper No. 1991/124).