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Fixed and Flexible Rates: A Renewal of The Debate

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  • Jacques R. Artus
  • John H. Young
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    Abstract

    The paper reviews the extent to which a decade of analysis and experience has altered thinking about the choice of an exchange rate system. The advantages of flexible rates are viewed to have been exaggerated. They do not permit governments to have permanently higher rates of economic activity at the expense of higher inflation as some thought. Further, the slow speed of adjustment to relative price changes limits the contribution of flexible rates to external adjustment in the short-run, and the degree of insulation from external influences that they provide. Finally, flexible rates tend to be fluctuating rates, and, although there is little empirical evidence so far showing that the fluctuations have had adverse effects on trade and capital flows, the exchange rate instability more than any other factor has led to a certain disillusionment with the floating rate system. Notwithstanding the drawbacks of flexible rates, there will be a continuing need for exchange rate flexibility over the next few years, and some analysis is given of the problems of achieving greater stability under flexible rates or the requisite amount of flexibility under pegged rates.

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    File URL: http://www.nber.org/papers/w0367.pdf
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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0367.

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    Date of creation: Jun 1979
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    Publication status: published as Artus, Jacques R. and Young, John H. "Fixed and Flexible Rates: A Renewal of the Debate." International Monetary Fund Staff Papers, Vol. 26, No. 4, (December 1979), pp. 654-698.
    Handle: RePEc:nbr:nberwo:0367

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    1. Azariadis, Costas, 1976. "On the Incidence of Unemployment," Review of Economic Studies, Wiley Blackwell, vol. 43(1), pages 115-25, February.
    2. Gordon, Donald F, 1974. "A Neo-Classical Theory of Keynesian Unemployment," Economic Inquiry, Western Economic Association International, vol. 12(4), pages 431-59, December.
    3. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-76, December.
    4. anonymous, 1978. "Does the sinking U.S. dollar mean the float isn't working?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum.
    5. F. Biesmans, 1977. "A Survey," Annals of Public and Cooperative Economics, Wiley Blackwell, vol. 48(1), pages 5-36, 01.
    6. Irving B. Kravis & Robert E. Lipsey & Eliot R. J. Kalter, 1977. "Export Prices and Exchange Rates," NBER Working Papers 0182, National Bureau of Economic Research, Inc.
    7. Rudolf R. Rhomberg, 1964. "A Model of the Canadian Economy Under Fixed and Fluctuating Exchange Rates," Journal of Political Economy, University of Chicago Press, vol. 72, pages 1.
    8. Lance Girton & Don Roper, 1976. "Theory and implications of currency substitution," International Finance Discussion Papers 86, Board of Governors of the Federal Reserve System (U.S.).
    9. Baily, Martin Neil, 1974. "Wages and Employment under Uncertain Demand," Review of Economic Studies, Wiley Blackwell, vol. 41(1), pages 37-50, January.
    10. Cornell, Bradford, 1977. "Spot rates, forward rates and exchange market efficiency," Journal of Financial Economics, Elsevier, vol. 5(1), pages 55-65, August.
    11. L. M. Muir, 1977. "Comment," Economic Papers, The Economic Society of Australia, vol. 1(56), pages 23-24, October.
    12. John H. Kareken & Neil Wallace, 1978. "International monetary reform: the feasible alternatives," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum.
    13. Thomas Willett & Edward Tower, 1970. "Currency areas and exchange-rate flexibility," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 105(1), pages 48-65, September.
    14. J. J. Polak, 1957. "Monetary Analysis of Income Formation and Payments Problems," IMF Staff Papers, Palgrave Macmillan, vol. 6(1), pages 1-50, November.
    15. Barro, Robert J., 1977. "Long-term contracting, sticky prices, and monetary policy," Journal of Monetary Economics, Elsevier, vol. 3(3), pages 305-316, July.
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