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Macroeconomic Adjustment Under Bretton Woods and the Post-Bretton-Woods Float: An Impulse-Response Analysis

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  • Bayoumi, Tamim
  • Eichengreen, Barry

Abstract

We use time-series methods to estimate a simple aggregate supply and demand model in order to analyse the comparative performance of fixed and flexible exchange rate systems and test competing hypotheses designed to explain shifts between exchange rate regimes. The paper provides a coherent explanation of the causes and consequences of the shift from the Bretton Woods System of pegged exchange rates to the post-Bretton-Woods float. The shift from fixed to floating was associated with a modest increase in the cross-country dispersion of supply shocks, but not with an increase in their average magnitude. There was little change in either the cross-country dispersion or the average magnitude of demand shocks. More important in explaining the collapse of Bretton Woods were factors that heightened the impact of shocks on the external account such as the 1958 removal of controls on current account convertibility and the declining effectiveness of capital controls. These factors obliged governments to respond to supply shocks with changes in demand that stabilized prices and the exchange rate at the expense of increased output volatility.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 729.

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Date of creation: Nov 1992
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Handle: RePEc:cpr:ceprdp:729

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Related research

Keywords: Bretton Woods; Demand Shocks; Economic Adjustment; Exchange Rates; Floating Rates; Regime changes; Supply Shocks;

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  1. Bayoumi, Tamim & Eichengreen, Barry, 1992. "Shocking Aspects of Monetary Unification," Department of Economics, Working Paper Series qt791143kp, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  2. Lippi, Marco & Reichlin, Lucrezia, 1993. "The Dynamic Effects of Aggregate Demand and Supply Disturbances: Comment," American Economic Review, American Economic Association, vol. 83(3), pages 644-52, June.
  3. Blanchard, Olivier Jean & Quah, Danny, 1989. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," American Economic Review, American Economic Association, vol. 79(4), pages 655-73, September.
  4. Hans Genberg & Alexander Swoboda, 1993. "The Provision of Liquidity in the Bretton Woods System," NBER Chapters, in: A Retrospective on the Bretton Woods System: Lessons for International Monetary Reform, pages 269-316 National Bureau of Economic Research, Inc.
  5. Barro, Robert J & Sala-i-Martin, Xavier, 1992. "Convergence," Journal of Political Economy, University of Chicago Press, vol. 100(2), pages 223-51, April.
  6. Tamim Bayoumi and Barry Eichengreen., 1992. "Is There a Conflict Between EC Enlargement and European Monetary Unification?," Economics Working Papers 92-188, University of California at Berkeley.
  7. Eichengreen, Barry, 1992. "Three Perspectives on the Bretton Woods System," Department of Economics, Working Paper Series qt8rg1h520, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  8. Michael D. Bordo, 1993. "The Bretton Woods International Monetary System: An Historical Overview," NBER Working Papers 4033, National Bureau of Economic Research, Inc.
  9. Marianne Baxter & Alan C. Stockman, 1990. "Business Cycles and the Exchange Rate System: Some International Evidence," NBER Working Papers 2689, National Bureau of Economic Research, Inc.
  10. Bayoumi, Tamim & Eichengreen, Barry, 1992. "Shocking Aspects of European Monetary Unification," CEPR Discussion Papers 643, C.E.P.R. Discussion Papers.
  11. Robert J. Barro & Xavier Sala-i-Martin, 1991. "Convergence across States and Regions," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 22(1), pages 107-182.
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