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Flexible Exchange Rates and Interdependence

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  • Rudiger Dornbusch

Abstract

The paper was prepared for the NBER-IMF conference on Exchange Rate Policy and Interdependence. It reviews the experience with flexible exchange rates and the main policy alternatives that have been suggested. The theoretical part develops a modern open economy macro model with an emphasis on capital mobility, real and nominal wage stickiness and expectations. The impact of disturbances is discussed in terms of the underlying structure, in particular, the relative role of real and nominal inflexibility. Among the main policy alternatives the paper reviews the McKinnon proposal for world monetarism, and the band proposal. Both of these schemes are found unsatisfactory in coping with the chief problem of the current systems namely how to cope with the transition to low inflation. The alternative of capital controls, likewise, would not avoid the adverse consequences of monetary stabilization it would only influence the particular details of the international transmission.

Suggested Citation

  • Rudiger Dornbusch, 1982. "Flexible Exchange Rates and Interdependence," NBER Working Papers 1035, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:1035 Note: ITI IFM
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    References listed on IDEAS

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    1. Frenkel, Jacob A & Mussa, Michael L, 1980. "The Efficiency of Foreign Exchange Markets and Measures of Turbulence," American Economic Review, American Economic Association, vol. 70(2), pages 374-381, May.
    2. Richard C. Marston, 1981. "Wages, Relative Prices, and the Choice between Fixed and Flexible Exchange Rates," NBER Working Papers 0793, National Bureau of Economic Research, Inc.
    3. Stephen W. Salant & Dale W. Henderson, 1976. "Market anticipations, government policy, and the price of gold," International Finance Discussion Papers 81, Board of Governors of the Federal Reserve System (U.S.).
    4. James Tobin, 1978. "A Proposal for International Monetary Reform," Eastern Economic Journal, Eastern Economic Association, vol. 4(3-4), pages 153-159, Jul/Oct.
    5. William H. Branson & Julio J. Rotemberg, 1991. "International Adjustment with Wage Rigidity," NBER Chapters,in: International Volatility and Economic Growth: The First Ten Years of The International Seminar on Macroeconomics, pages 13-44 National Bureau of Economic Research, Inc.
    6. Buiter, Willem H & Miller, Marcus, 1981. "Monetary Policy and International Competitiveness: The Problems of Adjustment," Oxford Economic Papers, Oxford University Press, vol. 33(0), pages 143-175, Supplemen.
    7. Blanchard, Olivier Jean, 1979. "Speculative bubbles, crashes and rational expectations," Economics Letters, Elsevier, vol. 3(4), pages 387-389.
    8. Obstfeld, Maurice, 1982. "Relative Prices, Employment, and the Exchange Rate in an Economy with Foresight," Econometrica, Econometric Society, vol. 50(5), pages 1219-1242, September.
    9. Tirole, Jean, 1982. "On the Possibility of Speculation under Rational Expectations," Econometrica, Econometric Society, vol. 50(5), pages 1163-1181, September.
    10. Jacob A. Frenkel & Michael L. Mussa, 1980. "Efficiency of Foreign Exchange Markets and Measures of Turbulence," NBER Working Papers 0476, National Bureau of Economic Research, Inc.
    11. Richard C. Marston, 1982. "Wages, Relative Prices and the Choice between Fixed and Flexible Exchange Rates," Canadian Journal of Economics, Canadian Economics Association, vol. 15(1), pages 87-103, February.
    12. Paul R. Krugman, 1981. "Consumption Preferences, Asset Demands, and Distribution Effects in International Financial Markets," NBER Working Papers 0651, National Bureau of Economic Research, Inc.
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    Citations

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    Cited by:

    1. Christopher Erceg & Christopher Gust & David López-Salido, 2007. "The Transmission of Domestic Shocks in Open Economies," NBER Chapters,in: International Dimensions of Monetary Policy, pages 89-148 National Bureau of Economic Research, Inc.
    2. Dornbusch, Rudiger, 1987. "Exchange Rates and Prices," American Economic Review, American Economic Association, vol. 77(1), pages 93-106, March.
    3. Christopher J. Erceg & Christopher J. Gust & David López-Salido, 2007. "The transmission of domestic shocks in the open economy," International Finance Discussion Papers 906, Board of Governors of the Federal Reserve System (U.S.).
    4. Cheung, Yin-Wong & Yuen, Jude, 2002. "Effects of U.S. Inflation on Hong Kong and Singapore," Journal of Comparative Economics, Elsevier, vol. 30(3), pages 603-619, September.
    5. Lee, Hyun-Hoon & Huh, Hyeon-Seung & Harris, David, 2003. "The relative impact of the US and Japanese business cycles on the Australian economy," Japan and the World Economy, Elsevier, vol. 15(1), pages 111-129, January.
    6. Grande, Giuseppe, 1997. "Properties of the monetary conditions index," MPRA Paper 23515, University Library of Munich, Germany.
    7. Yin-Wong Cheung, 2000. "Hong Kong Output Dynamics: An Empirical Analysis," Working Papers 112000, Hong Kong Institute for Monetary Research.
    8. Dominguez, Kathryn M., 1986. "Are foreign exchange forecasts rational? : New evidence from survey data," Economics Letters, Elsevier, vol. 21(3), pages 277-281.
    9. Chiou-Wei, Song-Zan & Zhu, Zhen, 2002. "Sources of export fluctuations: empirical evidence from Taiwan and South Korea, 1981-2000," Journal of Asian Economics, Elsevier, vol. 13(1), pages 105-118.
    10. Dibooglu, Selahattin, 1998. "The incidence and effects of macroeconomic disturbances under alternative exchange rate systems: evidence since the classical gold standard," International Review of Economics & Finance, Elsevier, vol. 7(2), pages 225-241.
    11. Michael D. Bordo & Ehsan U. Choudhri & Anna J. Schwartz, 1984. "Money Growth Variability and Money Supply Interdependence Under InterestRate Control: Some Evidence For Canada," NBER Working Papers 1480, National Bureau of Economic Research, Inc.
    12. Kim, Jongwoo, 2000. "The relationship between the monetary regime and output volatility: a multivariate GARCH-M model of the Japanese experience, 1919-1996," Japan and the World Economy, Elsevier, vol. 12(1), pages 49-69, January.
    13. Sissoko, Yaya & Dibooglu, Sel, 2006. "The exchange rate system and macroeconomic fluctuations in Sub-Saharan Africa," Economic Systems, Elsevier, vol. 30(2), pages 141-156, June.

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