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

  • Bayoumi, Tamim
  • Eichengreen, Barry

We use time-series methods to estimate a simple aggregate supply and demand model in order to analyse 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. 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 account such as the 1958 removal of controls on current account convertibility and the declining effectiveness of capital controls. These factors obliged 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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Paper provided by Department of Economics, Institute for Business and Economic Research, UC Berkeley in its series Department of Economics, Working Paper Series with number qt4gf4d2hc.

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Date of creation: 01 Aug 1992
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Handle: RePEc:cdl:econwp:qt4gf4d2hc
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  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 655-73, September.
  2. 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.
  3. Barry Eichengreen, 1992. "Three Perspectives on the Bretton Woods System," NBER Working Papers 4141, National Bureau of Economic Research, Inc.
  4. Michael D. Bordo, 1992. "The Bretton Woods International Monetary System: An Historical Overview," NBER Working Papers 4033, National Bureau of Economic Research, Inc.
  5. Jeff Frankel, Steve Phillips, and Menzie Chinn., 1992. "Financial and Currency Integration in the European Monetary System: The Statistical Record," Center for International and Development Economics Research (CIDER) Working Papers C92-005, University of California at Berkeley.
  6. 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.
  7. Abramovitz,Moses, 1991. "Thinking about Growth," Cambridge Books, Cambridge University Press, number 9780521407748, Junio.
  8. Tamim Bayoumi and Barry Eichengreen., 1992. "Shocking Aspects of European Monetary Unification," Economics Working Papers 92-187, University of California at Berkeley.
  9. 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.
  10. 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.
  11. Marco Lippi & Lucrezia Reichlin, 1993. "The dynamic effects of aggregate demand and supply disturbances: comment," ULB Institutional Repository 2013/10159, ULB -- Universite Libre de Bruxelles.
  12. Bomhoff, Edward J. & Korteweg, Pieter, 1983. "Exchange rate variability and monetary policy under rational expectations: Some Euro-American experience 1973-1979," Journal of Monetary Economics, Elsevier, vol. 11(2), pages 169-206.
  13. 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.
  14. Barro, Robert J & Sala-i-Martin, Xavier, 1992. "Convergence," Journal of Political Economy, University of Chicago Press, vol. 100(2), pages 223-51, 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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