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The Comparative Performance of Fixed and Flexible Exchange Rate Regimes : Interwar Evidence

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  • Barry Eichengreen

Abstract

This paper reports evidence on the characteristics of fixed and flexible exchange rate regimes. It contrasts experience under three interwar exchange rate regimes: the free float of the early 1920s, the fixed rates of 1927-31, and the managed float of the early 1930s. A number of important differences across nominal exchange rate regimes emerge. Major findings include: (1) The variability of nominal exchange rates was positively associated with the freedom of the float. Nominal rates were considerably more variable under free than managed floating. (2) The reduction in nominal exchange rate variability achieved with the move from free to managed floating was not accompanied by a commensurate fall in exchange rate uncertainty. While government policy succeeded in damping spot rate fluctuations, it seems to have been subject to periodic shifts that heightened risk. (3) There was a strong association between nominal exchange rate predictability and real exchange rate predictability in both the free float of 1922-26 and the managed float of 1932-36. Together with (2), this implies that intervention of stabilize nominal rates did not guarantee a commensurate reduction in real exchange rate uncertainty. (4) There was no direct correspondence between the degree of exchange rate stability and the volume of international capital flows. Real interest differentials were larger under the managed float of the 1930s than under the free float of the 1920s. (5) Capital controls provide a major part of the explanation for differences across regimes in the magnitude of real interest differentials. Controls were considerably more prevalent under managed floating than under either free floating or fixed rates. Thus, interwar experience provides a counterexample to the popular notion that capital controls tend to be associated with fixed rate regimes.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3097.

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Date of creation: Sep 1989
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Publication status: published as in Niels Thysgesen et al (eds.) Business Cycles: Theories, Evidence and Analysis, London: Macmillan, 1992
Handle: RePEc:nbr:nberwo:3097

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  1. Eichengreen, Barry, 1988. "Real exchange rate behavior under alternative international monetary regimes : Interwar evidence," European Economic Review, Elsevier, vol. 32(2-3), pages 363-371, March.
  2. Eichengreen, Barry, 1984. "International Policy Coordination in Historical Perspective: A View from the Interwar Years," CEPR Discussion Papers 29, C.E.P.R. Discussion Papers.
  3. Frankel, Jeffrey A. & MacArthur, Alan T., 1988. "Political vs. currency premia in international real interest differentials : A study of forward rates for 24 countries," European Economic Review, Elsevier, vol. 32(5), pages 1083-1114, June.
  4. Barry Eichengreen, 1991. "International Monetary Instability Between the Wars: Structural Flaws or Misguided Policies?," NBER Working Papers 3124, National Bureau of Economic Research, Inc.
  5. Artis, M. J., 1987. "The European monetary system: An evaluation," Journal of Policy Modeling, Elsevier, vol. 9(1), pages 175-198.
  6. Francesco Giavazzi & Alberto Giovannini, 1988. "Can The European Monetary System Be Copied Outside Europe? Lessons From Ten Years of Monetary Policy Coordination In Europe," NBER Working Papers 2786, National Bureau of Economic Research, Inc.
  7. Aliber, Robert Z, 1973. "The Interest Rate Parity Theorem: A Reinterpretation," Journal of Political Economy, University of Chicago Press, vol. 81(6), pages 1451-59, Nov.-Dec..
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Cited by:
  1. Barry Eichengreen., 1992. "Three Perspectives on the Bretton Woods System," Economics Working Papers 92-191, University of California at Berkeley.
  2. Barry Eichengreen, 1990. "Relaxing the External Constraint: Europe in the 1930s," NBER Working Papers 3410, National Bureau of Economic Research, Inc.
  3. Richard C. Marston, 1992. "Interest Differentials Under Fixed and Flexible Exchange Rates: The Effects of Capital Controls and Exchange Risk," NBER Working Papers 4053, National Bureau of Economic Research, Inc.
  4. Eichengreen, Barry, 1990. "Is Europe an Optimum Currency Area?," Department of Economics, Working Paper Series qt40m5g6pp, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  5. Scott Andrew Urban, 2009. "The Name of the Rose: Classifying 1930s Exchange-Rate Regimes," Oxford University Economic and Social History Series _076, Economics Group, Nuffield College, University of Oxford.
  6. Scott Andrew Urban, 2009. "The Name of the Rose: Classifying 1930s Exchange-Rate Regimes," Economics Series Working Papers Paper 76, University of Oxford, Department of Economics.

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