IDEAS home Printed from
MyIDEAS: Login to save this paper or follow this series

The Adjustment Mechanism

  • Obstfeld, Maurice

This paper studies the mechanisms of international payments adjustment at work under the Bretton Woods system of fixed exchange rates between 1945 and 1971. I argue that two market failures - imperfect international capital mobility and imperfect wage-price flexibility - are central to understanding the adjustment problems of that period. Imperfect capital mobility implied that even intertemporally solvent governments could face international liquidity constraints. Wage-price inflexibility implied that countries suffering from simultaneous reserve loss and unemployment might need to undergo lengthy transitions before returning to balance. By the 1960s, when trade had been substantially liberalized and partial convertibility restored, the main remaining adjustment weapon was currency realignment: devaluation could eliminate an unemployment-cum-deficit dilemma in a stroke, while revaluation could relieve the inflationary pressures in surplus countries. The currency realignment option proved incompatible, however, with the growing efficiency of the international capital market. Under the classical gold standard, high capital mobility had supported the credibility of fixed exchange rates. Under Bretton Woods, fixed gold parities did not have primacy among other economic objectives; and increasing capital mobility undermined the regime as governments proved unwilling to stand by key systemic commitments.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
Download Restriction: CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 648.

in new window

Date of creation: May 1992
Date of revision:
Handle: RePEc:cpr:ceprdp:648
Contact details of provider: Postal: Centre for Economic Policy Research, 77 Bastwick Street, London EC1V 3PZ.
Phone: 44 - 20 - 7183 8801
Fax: 44 - 20 - 7183 8820

Order Information: Email:

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Michael R. Darby & James R. Lothian & Arthur E. Gandolfi & Anna J. Schwartz & Alan C. Stockman, 1983. "The International Transmission of Inflation," NBER Books, National Bureau of Economic Research, Inc, number darb83-1, July.
  2. Miles, Marc A, 1979. "The Effects of Devaluation on the Trade Balance and the Balance of Payments: Some New Results," Journal of Political Economy, University of Chicago Press, vol. 87(3), pages 600-20, June.
  3. Foley, Duncan K & Hellwig, Martin F, 1975. "Asset Management with Trading Uncertainty," Review of Economic Studies, Wiley Blackwell, vol. 42(3), pages 327-46, July.
  4. Helpman, Elhanan, 1981. "An Exploration in the Theory of Exchange-Rate Regimes," Scholarly Articles 3445091, Harvard University Department of Economics.
  5. Michael D. Bordo & Finn E. Kydland, 1992. "The gold standard as a rule," Working Paper 9205, Federal Reserve Bank of Cleveland.
  6. Maurice Obstfeld, 1980. "Imperfect Asset Substitutability and Monetary Policy under Fixed Exchange Rates," NBER Working Papers 0485, National Bureau of Economic Research, Inc.
  7. Barry Eichengreen, 1989. "The Gold Standard Since Alec Ford," NBER Working Papers 3122, National Bureau of Economic Research, Inc.
  8. Fumio Hayashi, 1989. "Japan's Saving Rate: New Data and Reflections," NBER Working Papers 3205, National Bureau of Economic Research, Inc.
  9. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-76, December.
  10. Grilli, Vittorio, 1990. "Managing exchange rate crises: evidence from the 1890s," Journal of International Money and Finance, Elsevier, vol. 9(3), pages 258-275, September.
  11. Rotemberg, Julio J, 1982. "Sticky Prices in the United States," Journal of Political Economy, University of Chicago Press, vol. 90(6), pages 1187-1211, December.
  12. Bela Balassa, 1964. "The Purchasing-Power Parity Doctrine: A Reappraisal," Journal of Political Economy, University of Chicago Press, vol. 72, pages 584.
  13. 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..
  14. Persson, Torsten, 1984. "Real transfers in fixed exchange rate systems and the international adjustment mechanism," Journal of Monetary Economics, Elsevier, vol. 13(3), pages 349-369, May.
  15. Maddison, Angus, 1987. "Growth and Slowdown in Advanced Capitalist Economies: Techniques of Quantitative Assessment," Journal of Economic Literature, American Economic Association, vol. 25(2), pages 649-98, June.
  16. Meese, Richard A., 1984. "Is the sticky price assumption reasonable for exchange rate models?," Journal of International Money and Finance, Elsevier, vol. 3(2), pages 131-139, August.
  17. Dooley, Michael P & Isard, Peter, 1980. "Capital Controls, Political Risk, and Deviations from Interest-Rate Parity," Journal of Political Economy, University of Chicago Press, vol. 88(2), pages 370-84, April.
  18. Barsky, Robert B., 1987. "The Fisher hypothesis and the forecastability and persistence of inflation," Journal of Monetary Economics, Elsevier, vol. 19(1), pages 3-24, January.
  19. Charles L. Schultze, 1981. "Some Macro Foundations for Micro Theory," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(2), pages 521-592.
  20. Bewley, Truman, 1983. "A Difficulty with the Optimum Quantity of Money," Econometrica, Econometric Society, vol. 51(5), pages 1485-504, September.
  21. Alogoskoufis, George S & Smith, Ron, 1991. "The Phillips Curve, the Persistence of Inflation, and the Lucas Critique: Evidence from Exchange-Rate Regimes," American Economic Review, American Economic Association, vol. 81(5), pages 1254-75, December.
  22. Laney, Leroy O. & Willett, Thomas D., 1982. "The international liquidity explosion and worldwide inflation: The evidence from sterilization coefficient estimates," Journal of International Money and Finance, Elsevier, vol. 1(1), pages 141-152, January.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:648. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.