Advanced Search
MyIDEAS: Login

The Adjustment Mechanism

Contents:

Author Info

  • Maurice Obstfeld

Abstract

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.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.nber.org/papers/w3943.pdf
Download Restriction: no

Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3943.

as in new window
Length:
Date of creation: Dec 1991
Date of revision:
Publication status: published as A Retrospective on the Bretton Woods System, edited by Michael D. Bordo and Barry Eichengreen, pp. 201-268. Chicago, IL: University of Chicago Press, 1993.
Handle: RePEc:nbr:nberwo:3943

Note: ITI IFM
Contact details of provider:
Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Phone: 617-868-3900
Email:
Web page: http://www.nber.org
More information through EDIRC

Related research

Keywords:

Other versions of this item:

Find related papers by JEL classification:

References

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.:
as in new window
  1. Obstfeld, Maurice, 1980. "Imperfect asset substitutability and monetary policy under fixed exchange rates," Journal of International Economics, Elsevier, vol. 10(2), pages 177-200, May.
  2. Barry Eichengreen, 1989. "The Gold Standard Since Alec Ford," NBER Working Papers 3122, National Bureau of Economic Research, Inc.
  3. Rotemberg, Julio J, 1982. "Sticky Prices in the United States," Journal of Political Economy, University of Chicago Press, vol. 90(6), pages 1187-1211, December.
  4. Miles, Marc A, 1979. "The Effects of Devaluation on the Trade Balance and the Balance of Payments: Some New Results," Journal of Political Economy, University of Chicago Press, vol. 87(3), pages 600-20, June.
  5. D. K. Foley & M. F. Hellwig, 1973. "Asset Management with Trading Uncertainty," Working papers 108, Massachusetts Institute of Technology (MIT), Department of Economics.
  6. Fumio Hayashi, 1989. "Japan's Saving Rate: New Data and Reflections," NBER Working Papers 3205, National Bureau of Economic Research, Inc.
  7. Michael D. Bordo & Finn E. Kydland, 1990. "The Gold Standard as a Rule," NBER Working Papers 3367, National Bureau of Economic Research, Inc.
  8. 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, May.
  9. Meese, Richard A., 1984. "Is the sticky price assumption reasonable for exchange rate models?," Journal of International Money and Finance, Elsevier, vol. 3(2), pages 131-139, August.
  10. Bela Balassa, 1964. "The Purchasing-Power Parity Doctrine: A Reappraisal," Journal of Political Economy, University of Chicago Press, vol. 72, pages 584.
  11. 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..
  12. Robert B. Barsky, 1986. "The Fisher Hypothesis and the Forecastability and Persistence of Inflation," NBER Working Papers 1927, National Bureau of Economic Research, Inc.
  13. Alogoskoufis, George S & Smith, Ron, 1991. "The Phillips Curve, the Persistence of Inflation, and the Lucas Critique: Evidence from Exchange-Rate Regimes," American Economic Review, American Economic Association, vol. 81(5), pages 1254-75, December.
  14. Bewley, Truman, 1983. "A Difficulty with the Optimum Quantity of Money," Econometrica, Econometric Society, vol. 51(5), pages 1485-504, September.
  15. Charles L. Schultze, 1981. "Some Macro Foundations for Micro Theory," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(2), pages 521-592.
  16. Persson, Torsten, 1984. "Real transfers in fixed exchange rate systems and the international adjustment mechanism," Journal of Monetary Economics, Elsevier, vol. 13(3), pages 349-369, May.
  17. Helpman, Elhanan, 1981. "An Exploration in the Theory of Exchange-Rate Regimes," Scholarly Articles 3445091, Harvard University Department of Economics.
  18. Dooley, Michael P & Isard, Peter, 1980. "Capital Controls, Political Risk, and Deviations from Interest-Rate Parity," Journal of Political Economy, University of Chicago Press, vol. 88(2), pages 370-84, April.
  19. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-76, December.
  20. Laney, Leroy O. & Willett, Thomas D., 1982. "The international liquidity explosion and worldwide inflation: The evidence from sterilization coefficient estimates," Journal of International Money and Finance, Elsevier, vol. 1(1), pages 141-152, January.
  21. Grilli, Vittorio, 1990. "Managing exchange rate crises: evidence from the 1890s," Journal of International Money and Finance, Elsevier, vol. 9(3), pages 258-275, September.
  22. Maddison, Angus, 1987. "Growth and Slowdown in Advanced Capitalist Economies: Techniques of Quantitative Assessment," Journal of Economic Literature, American Economic Association, vol. 25(2), pages 649-98, June.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Hans-Joachim Voth, 2003. "Convertibility, currency controls and the cost of capital in Western Europe, 1950-1999," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 8(3), pages 255-276.
  2. Helge Berger & Ulrich Woitek, 1999. "Does Conservatism Matter? A Time Series Approach to Central Banking," CESifo Working Paper Series 190, CESifo Group Munich.
  3. Adam Klug & Gregor W. Smith, 1999. "Suez and Sterling, 1956," Working Papers 1256, Queen's University, Department of Economics.
  4. Berger, Helge & Woitek, Ulrich, 2001. "The German political business cycle: money demand rather than monetary policy," European Journal of Political Economy, Elsevier, vol. 17(3), pages 609-631, September.
  5. Obstfeld, Maurice, 2006. "The Renminbi's Dollar Peg at the Crossroads," CEPR Discussion Papers 5771, C.E.P.R. Discussion Papers.
  6. Obstfeld, Maurice & Taylor, Alan M, 1997. "The Great Depression as a Watershed: International Capital Mobility over the Long Run," CEPR Discussion Papers 1633, C.E.P.R. Discussion Papers.
  7. Bernhard Eschweiler & Michael D. Bordo, 1995. "Rules, Discretion, and Central Bank Independence: The German Experience 1880-1989," NBER Working Papers 4547, National Bureau of Economic Research, Inc.
  8. Michael D. Bordo, 2005. "Historical Perspective on Global Imbalances," NBER Working Papers 11383, National Bureau of Economic Research, Inc.
  9. Michael D. Bordo & Barry Eichengreen, 1998. "The Rise and Fall of a Barbarous Relic: The Role of Gold in the International Monetary SYstem," NBER Working Papers 6436, National Bureau of Economic Research, Inc.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:3943. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.