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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.
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Suggested Citation

  • Bayoumi, Tamim & Eichengreen, Barry, 1992. "Macroeconomic Adjustment Under Bretton Woods and the Post-Bretton-Woods Float: An Impulse-Response Analysis," Department of Economics, Working Paper Series qt4gf4d2hc, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  • Handle: RePEc:cdl:econwp:qt4gf4d2hc
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    References listed on IDEAS

    as
    1. 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.
    2. 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.
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    5. 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.
    6. Barry Eichengreen., 1992. "Three Perspectives on the Bretton Woods System," Economics Working Papers 92-191, University of California at Berkeley.
    7. 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.
    8. Barro, Robert J & Sala-i-Martin, Xavier, 1992. "Convergence," Journal of Political Economy, University of Chicago Press, vol. 100(2), pages 223-251, April.
      • Barro, R.J. & Sala-I-Martin, X., 1991. "Convergence," Papers 645, Yale - Economic Growth Center.
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    11. Michael D. Bordo, 1993. "The Bretton Woods International Monetary System: A Historical Overview," NBER Chapters, in: A Retrospective on the Bretton Woods System: Lessons for International Monetary Reform, pages 3-108, National Bureau of Economic Research, Inc.
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    More about this item

    Keywords

    Bretton Woods; exchange rates; international adjustment; Social and Behavioral Sciences; Business;
    All these keywords.

    JEL classification:

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

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