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Macroeconomic Adjustment under Bretton Woods and the Post-Bretton-Woods Float: An Impulse-Response Analysis

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  • Bayoumi, Tamim
  • Eichengreen, Barry

Abstract

We use time-series methods to estimate a simple aggregate-supply-aggregate-demand model in order to analyze the comparative performance of fixed- and flexible-exchange-rate systems and test competing hypotheses designed to explain shifts between exchange-rate regimes. The paper provides a coherent explanation of the causes and consequences of the shift from the Bretton Woods System of pegged exchange rates to the post-Bretton-Woods float. The shift from fixed to floating was associated with a modest increase in the cross-country dispersion of supply shocks but not with an increase in their average magnitude. In contrast, there was little change in either the cross-country dispersion or the average magnitude of demand shocks. More important in explaining the collapse of Bretton Woods were factors that heightened the impact of shocks on the external accounts, forcing governments to respond to supply shocks with changes in demand that stabilized prices and the exchange rate at the expense of increased output volatility.

Suggested Citation

  • Bayoumi, Tamim & Eichengreen, Barry, 1993. "Macroeconomic Adjustment under Bretton Woods and the Post-Bretton-Woods Float: An Impulse-Response Analysis," Center for International and Development Economics Research (CIDER) Working Papers 233178, University of California-Berkeley, Department of Economics.
  • Handle: RePEc:ags:ucbewp:233178
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    File URL: http://ageconsearch.umn.edu/record/233178/files/cal-cider-c093-006.pdf
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    References listed on IDEAS

    as
    1. Lippi, Marco & Reichlin, Lucrezia, 1993. "The Dynamic Effects of Aggregate Demand and Supply Disturbances: Comment," American Economic Review, American Economic Association, vol. 83(3), pages 644-652, June.
    2. Blanchard, Olivier Jean & Quah, Danny, 1989. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," American Economic Review, American Economic Association, vol. 79(4), pages 655-673, September.
    3. Bayoumi, Tamim & Eichengreen, Barry, 1992. "Shocking Aspects of Monetary Unification," Department of Economics, Working Paper Series qt791143kp, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    4. Robert J. Barro & Xavier Sala-i-Martin, 1991. "Convergence across States and Regions," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 22(1), pages 107-182.
    5. Frankel, Jeff & Phillips, Steve & Chinn, Menzie, 1992. "Financial and Currency Integration in the European Monetary System: The Statistical Record," Center for International and Development Economics Research (CIDER) Working Papers 233177, University of California-Berkeley, Department of Economics.
    6. Tamim Bayoumi & Barry Eichengreen, 1992. "Shocking Aspects of European Monetary Unification," NBER Working Papers 3949, National Bureau of Economic Research, Inc.
    7. Abramovitz,Moses, 1991. "Thinking about Growth," Cambridge Books, Cambridge University Press, number 9780521407748.
    8. Tamim Bayoumi & Barry Eichengreen, 1992. "Is There a Conflict Between EC Enlargement and European Monetary Unification?," NBER Working Papers 3950, National Bureau of Economic Research, Inc.
    9. Barry Eichengreen, 1992. "Three Perspectives on the Bretton Woods System," NBER Working Papers 4141, National Bureau of Economic Research, Inc.
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    12. Marianne Baxter & Alan C. Stockman, 1988. "Business Cycles and the Exchange Rate System: Some International Evidence," NBER Working Papers 2689, National Bureau of Economic Research, Inc.
    13. Baxter, Marianne & Stockman, Alan C., 1989. "Business cycles and the exchange-rate regime : Some international evidence," Journal of Monetary Economics, Elsevier, vol. 23(3), pages 377-400, May.
    14. Barro, Robert J & Sala-i-Martin, Xavier, 1992. "Convergence," Journal of Political Economy, University of Chicago Press, vol. 100(2), pages 223-251, April.
    15. Hans Genberg & Alexander Swoboda, 1993. "The Provision of Liquidity in the Bretton Woods System," NBER Chapters,in: A Retrospective on the Bretton Woods System: Lessons for International Monetary Reform, pages 269-316 National Bureau of Economic Research, Inc.
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    More about this item

    Keywords

    Research Methods/ Statistical Methods;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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