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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 examines 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. Nominal rates were considerably more variable under free than under managed floating. 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 because government policy seems to have been subject to periodic shifts that heightened risk. There was a strong association between nominal and real exchange rate predictability in both the free float of 1922-6 and the managed float of 1932-6. There was no direct correspondence between the degree of exchange rate stability and the volume of international capital flows. Capital controls, which were considerably more prevalent under managed floating than either of the other regimes, provide a major part of the explanation for differences across regimes in the magnitude of real interest differentials.

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Bibliographic Info

Paper provided by University of California at Berkeley in its series Economics Working Papers with number 89-119.

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Date of creation: 01 Aug 1989
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Handle: RePEc:ucb:calbwp:89-119

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References

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  1. 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.
  2. Eichengreen, Barry, 1987. "Real Exchange Rate Behavior Under Alternative International Monetary Regimes: Interwar Evidence," Department of Economics, Working Paper Series qt0nh766xh, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  3. Artis, M. J., 1987. "The European monetary system: An evaluation," Journal of Policy Modeling, Elsevier, vol. 9(1), pages 175-198.
  4. 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..
  5. Barry Eichengreen., 1989. "International Monetary Instability Between the Wars: Structural Flaws or Misguided Policies?," Economics Working Papers 89-118, University of California at Berkeley.
  6. Jeffrey A. Frankel & Alan T. MacArthur, 1988. "Political vs. Currency Premia in International Real Interest Differentials: A Study of Forward Rates for 24 Countries," NBER Working Papers 2309, National Bureau of Economic Research, Inc.
  7. Barry Eichengreen, 1985. "International Policy Coordination In Historical Perspective: A View From The Interwar Years," NBER Chapters, in: International Economic Policy Coordination, pages 139-183 National Bureau of Economic Research, Inc.
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Cited by:
  1. Barry Eichengreen, 1991. "Is Europe an Optimum Currency Area?," NBER Working Papers 3579, National Bureau of Economic Research, Inc.
  2. 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.
  3. Eichengreen, Barry, 1990. "Relaxing the External Constraint: europe in the 1930s," Department of Economics, Working Paper Series qt45x5d198, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  4. 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.

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