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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 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. 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. 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.
  3. Jeffrey A. Frankel and Alan T. MacArthur., 1987. "Political vs. Currency Premia in International Real Interest Differentials: A Study of Forward Rates for 24 Countries," Economics Working Papers 8762, University of California at Berkeley.
  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. Eichengreen, Barry, 1989. "International Monetary Stability Between the Wars: Structural Flaws or Misguided Policies?," CEPR Discussion Papers 348, C.E.P.R. Discussion Papers.
  6. Artis, M. J., 1987. "The European monetary system: An evaluation," Journal of Policy Modeling, Elsevier, vol. 9(1), pages 175-198.
  7. 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.
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Cited by:
  1. Barry Eichengreen., 1990. "Relaxing the External Constraint: Europe in the 1930s," Economics Working Papers 90-147, University of California at Berkeley.
  2. Barry Eichengreen., 1992. "Three Perspectives on the Bretton Woods System," Economics Working Papers 92-191, University of California at Berkeley.
  3. 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.
  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. 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.

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