{ "title": "Friedman Redux: External Adjustment and Exchange Rate Flexibility", "publication": "IMF Working Papers, August 8, 2014", "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2016/12/31/friedman-redux-external-adjustment-and-exchange-rate-flexibility-41836", "canonical": "https://www.imf.org/en/publications/wp/issues/2016/12/31/friedman-redux-external-adjustment-and-exchange-rate-flexibility-41836", "overlayPath": "/en/publications/wp/issues/2016/12/31/friedman-redux-external-adjustment-and-exchange-rate-flexibility-41836/index.md", "summary": "Milton Friedman argued that flexible exchange rates would facilitate external adjustment. Recent studies find surprisingly little robust evidence that they do.", "sections": [ { "heading": "Authors and Publication", "content": "- Authors: Atish R. Ghosh, Mahvash S Qureshi, Charalambos G Tsangarides\n- Publication type: IMF Working Paper No. 2014/146\n- Date: August 8, 2014\n- Pages: 43\n- Volume: 2014; Issue: 146\n- DOI: https://doi.org/10.5089/9781498359245.001\n- Stock No: WPIEA2014146\n- ISBN: 9781498359245\n- ISSN: 1018-5941" }, { "heading": "Research question and motivation", "content": "- Examines Milton Friedman’s proposition that flexible exchange rates facilitate external adjustment.\n- Motivated by recent studies that find little robust evidence supporting that proposition.\n- Hypothesis: Aggregate exchange rate regime classifications mask heterogeneous bilateral relationships that matter for external adjustment." }, { "heading": "Dataset and methodology", "content": "- Constructed a novel dataset of bilateral exchange rate regimes for 181 countries.\n- Time span of the dataset: 1980–2011.\n- Dataset differentiates:\n - By the degree of exchange rate flexibility.\n - By direct and indirect exchange rate relationships.\n- Empirical strategy includes analysis of cross-country relationships and several “natural experiments” involving exogenous changes in bilateral exchange rate regimes." }, { "heading": "Key findings", "content": "- There is a significant and empirically robust relationship between exchange rate flexibility and the speed of external adjustment.\n- Results contrast with prior literature that used composite (aggregate) regime classifications, which can mask heterogeneous bilateral relationships.\n- Evidence is supported by multiple “natural experiments” of exogenous bilateral regime changes, reinforcing causal interpretation." }, { "heading": "Subjects and keywords (as labeled in the source)", "content": "- Subjects: Conventional peg, Exchange rate arrangements, Exchange rate flexibility, Exchange rates, Foreign exchange, International trade, Trade balance\n- Keywords: bilateral trade balance, classification dataset, Conventional peg, Eurozone country, exchange rate, Exchange rate arrangements, Exchange rate flexibility, exchange rate regime, exchange rate regimes, Exchange rates, external dynamics, Global, global imbalances, regime classification, regime classification dataset, regime relationship, regime switch, switch year, Trade balance, WP" }, { "heading": "Implications and interpretive points", "content": "- Aggregate regime classifications can obscure important bilateral dynamics that affect external adjustment.\n- Differentiating bilateral regime relationships and degrees of flexibility yields clearer empirical support for Friedman’s proposition.\n- Use of bilateral, flexibility-differentiated regime data enables identification of exogenous regime shifts useful for causal inference.\n\nContent based on \"Friedman Redux: External Adjustment and Exchange Rate Flexibility\", IMF Working Papers (2014) by Atish R. Ghosh, Mahvash S Qureshi, and Charalambos G Tsangarides.\n\n---\n\n Content in this bundle\n\n- Wp14146\n - Wp14146 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n - Wp14146 (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2016/12/31/friedman-redux-external-adjustment-and-exchange-rate-flexibility-41836" } ], "bullets": [ "[Markdown version](/en/publications/wp/issues/2016/12/31/friedman-redux-external-adjustment-and-exchange-rate-flexibility-41836/index.md)", "[Structured JSON version](/en/publications/wp/issues/2016/12/31/friedman-redux-external-adjustment-and-exchange-rate-flexibility-41836/index.json)", "[Bundle manifest](/en/publications/wp/issues/2016/12/31/friedman-redux-external-adjustment-and-exchange-rate-flexibility-41836/bundle-manifest.json)", "Authors: Atish R. Ghosh, Mahvash S Qureshi, Charalambos G Tsangarides", "Published: August 8, 2014", "Series: IMF Working Papers", "DOI: https://doi.org/10.5089/9781498359245.001", "Authors: Atish R. Ghosh, Mahvash S Qureshi, Charalambos G Tsangarides", "Publication type: IMF Working Paper No. 2014/146", "Date: August 8, 2014", "Pages: 43", "Volume: 2014; Issue: 146", "DOI: https://doi.org/10.5089/9781498359245.001", "Stock No: WPIEA2014146", "ISBN: 9781498359245", "ISSN: 1018-5941", "Examines Milton Friedman’s proposition that flexible exchange rates facilitate external adjustment.", "Motivated by recent studies that find little robust evidence supporting that proposition.", "Hypothesis: Aggregate exchange rate regime classifications mask heterogeneous bilateral relationships that matter for external adjustment.", "Constructed a novel dataset of bilateral exchange rate regimes for 181 countries.", "Time span of the dataset: 1980–2011.", "Dataset differentiates:", "Empirical strategy includes analysis of cross-country relationships and several “natural experiments” involving exogenous changes in bilateral exchange rate regimes.", "There is a significant and empirically robust relationship between exchange rate flexibility and the speed of external adjustment.", "Results contrast with prior literature that used composite (aggregate) regime classifications, which can mask heterogeneous bilateral relationships.", "Evidence is supported by multiple “natural experiments” of exogenous bilateral regime changes, reinforcing causal interpretation.", "Subjects: Conventional peg, Exchange rate arrangements, Exchange rate flexibility, Exchange rates, Foreign exchange, International trade, Trade balance", "Keywords: bilateral trade balance, classification dataset, Conventional peg, Eurozone country, exchange rate, Exchange rate arrangements, Exchange rate flexibility, exchange rate regime, exchange rate regimes, Exchange rates, external dynamics, Global, global imbalances, regime classification, regime classification dataset, regime relationship, regime switch, switch year, Trade balance, WP", "Aggregate regime classifications can obscure important bilateral dynamics that affect external adjustment.", "Differentiating bilateral regime relationships and degrees of flexibility yields clearer empirical support for Friedman’s proposition.", "Use of bilateral, flexibility-differentiated regime data enables identification of exogenous regime shifts useful for causal inference.", "**Wp14146**" ], "related": [ { "title": "Wp14146", "role": "document", "sourceUrl": "https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2014/_wp14146.pdf", "summary": { "path": "/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2014/_wp14146.pdf.md", "mime": "text/markdown" }, "binary": { "path": "/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2014/_wp14146.pdf", "mime": "application/pdf" } } ], "alternates": { "markdown": "/en/publications/wp/issues/2016/12/31/friedman-redux-external-adjustment-and-exchange-rate-flexibility-41836/index.md", "json": "/en/publications/wp/issues/2016/12/31/friedman-redux-external-adjustment-and-exchange-rate-flexibility-41836/index.json", "bundleManifest": "/en/publications/wp/issues/2016/12/31/friedman-redux-external-adjustment-and-exchange-rate-flexibility-41836/bundle-manifest.json" }, "generatedAtUtc": "2026-09-17T14:43:39.489Z" }