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The Comparative Performance of Fixed and Flexible Exchange Rate Regimes: Interwar Evidence

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  • Barry Eichengreen.

Abstract

This paper examines three interwar exchange rate regimes: the free float of the early 1920s, the fixed rates of 1927-31 and the managed float of the early 1930s. Nominal rates were considerably more variable under free than under managed floating. The reduction in nominal exchange rate variability achieved with the move from free to managed floating was not accompanied by a commensurate fall in exchange rate uncertainty because government policy seems to have been subject to periodic shifts that heightened risk. There was a strong association between nominal and real exchange rate predictability in both the free float of 1922-6 and the managed float of 1932-6. There was no direct correspondence between the degree of exchange rate stability and the volume of international capital flows. Capital controls, which were considerably more prevalent under managed floating than either of the other regimes, provide a major part of the explanation for differences across regimes in the magnitude of real interest differentials.
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Suggested Citation

  • Barry Eichengreen., 1989. "The Comparative Performance of Fixed and Flexible Exchange Rate Regimes: Interwar Evidence," Economics Working Papers 89-119, University of California at Berkeley.
  • Handle: RePEc:ucb:calbwp:89-119
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    File URL: http://papers.nber.org/papers/W3097
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    References listed on IDEAS

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    1. Eichengreen, Barry, 1988. "Real exchange rate behavior under alternative international monetary regimes : Interwar evidence," European Economic Review, Elsevier, vol. 32(2-3), pages 363-371, March.
    2. Francesco Giavazzi & Alberto Giovannini, 1990. "Can the European Monetary System be Copied Outside Europe? Lessons from Ten Years of Monetary Policy Coordination in Europe," NBER Chapters,in: International Policy Coordination and Exchange Rate Fluctuations, pages 247-278 National Bureau of Economic Research, Inc.
    3. Aliber, Robert Z, 1973. "The Interest Rate Parity Theorem: A Reinterpretation," Journal of Political Economy, University of Chicago Press, vol. 81(6), pages 1451-1459, Nov.-Dec..
    4. Eichengreen, Barry, 1989. "International Monetary Istability Between the Wars: Structural Flaws or Misguided Policies?," Department of Economics, Working Paper Series qt5r60q801, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    5. Barry Eichengreen, 1985. "International Policy Coordination in Historical Perspective: A View from the Interwar Years," NBER Chapters,in: International Economic Policy Coordination, pages 139-183 National Bureau of Economic Research, Inc.
    6. Frankel, Jeffrey A. & MacArthur, Alan T., 1988. "Political vs. currency premia in international real interest differentials : A study of forward rates for 24 countries," European Economic Review, Elsevier, vol. 32(5), pages 1083-1114, June.
    7. Artis, M. J., 1987. "The European monetary system: An evaluation," Journal of Policy Modeling, Elsevier, vol. 9(1), pages 175-198.
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    Cited by:

    1. Richard C. Marston, 1992. "Interest Differentials Under Fixed and Flexible Exchange Rates: The Effects of Capital Controls and Exchange Risk," NBER Working Papers 4053, National Bureau of Economic Research, Inc.
    2. Eichengreen, Barry, 1990. "Relaxing the External Constraint: europe in the 1930s," Department of Economics, Working Paper Series qt45x5d198, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    3. Barry Eichengreen, 1992. "Three Perspectives on the Bretton Woods System," NBER Working Papers 4141, National Bureau of Economic Research, Inc.
    4. Eichengreen, Barry, 1990. "Is Europe an Optimum Currency Area?," Department of Economics, Working Paper Series qt40m5g6pp, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    5. Scott Andrew Urban, 2009. "The Name of the Rose: Classifying 1930s Exchange-Rate Regimes," Oxford University Economic and Social History Series _076, Economics Group, Nuffield College, University of Oxford.
    6. Scott Andrew Urban, 2009. "The Name of the Rose: Classifying 1930s Exchange-Rate Regimes," Economics Series Working Papers Paper 76, University of Oxford, Department of Economics.

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