This paper studies the mechanisms of international payments adjustment at work under the Bretton Woods system of fixed exchange rates, 1945 to 1971. I argue that two market failures, imperfect international capital mobility and imperfect wage-price flexibility, are central to understanding the adjustment problems of that period. Imperfect capital mobility implied that even intertemporally solvent governments could face international liquidity constraints. Wage-price inflexibility implied that countries suffering from simultaneous reserve loss and unemployment might need to undergo lengthy transitions before returning to balance. By the 1960s, when trade had been substantially liberalized and partial convertibility restored, the main remaining adjustment weapon was currency realignment: devaluation could eliminate an unemployment-cum-deficit dilemma in a stroke, while revaluation could relieve the inflationary pressures in surplus countries. The currency-realignment option proved incompatible with the growing efficiency of the international capital market, however. Under the classical gold standard, high capital mobility had supported the credibility of fixed exchange rates. Under Bretton Woods fixed gold parities did not have primacy among other economic objectives; and increasing capital mobility undermined the regime as governments proved unwilling to stand by key systemic commitments.
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3943.
Length: Date of creation: Jan 1993 Date of revision: Publication status: published relationship to a non-chapter. This should not happen. Please contact NBER. Handle: RePEc:nbr:nberwo:3943
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Maurice Obstfeld, 1993.
"The Adjustment Mechanism,"
NBER Chapters,
in: A Retrospective on the Bretton Woods System: Lessons for International Monetary Reform, pages 201-268
National Bureau of Economic Research, Inc.
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References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Michael R. Darby & James R. Lothian & Arthur E. Gandolfi & Anna J. Schwartz & Alan C. Stockman, 1983.
"The International Transmission of Inflation,"
NBER Books,
National Bureau of Economic Research, Inc, number darb83-1.
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