Macroeconomic Effects of Nominal Exchange Rate Regimes: New Insights into the Role of Price Dynamics

39 Pages Posted: 1 May 2001

See all articles by Robert Kollmann

Robert Kollmann

ECARES, Université Libre de Bruxelles; University of Paris XII - Department of Economics; Centre for Economic Policy Research (CEPR)

Date Written: April 4, 2001

Abstract

This paper analyzes the effects of pegged and floating exchange rates using a two-country dynamic general equilibrium model that is calibrated to the U.S. and a European aggregate. The model assumes shocks to money, productivity and the interest parity condition. It captures the fact that the sharp increase in nominal exchange rate volatility after the abandonment of the Bretton Woods (BW) system was accompanied by a commensurate rise in real exchange rate volatility, but had no pronounced effect on the volatility of U.S. and European output. This holds irrespective of whether flexible and sticky prices are assumed - which casts doubt on the widespread view that the roughly equal rise in nominal and real exchange rate volatility reflects price stickiness. Flex-prices variants of the model capture better the fact that the cross-region output correlation has been higher in the floating-rate era.

Keywords: nominal exchange rate regimes, price dynamics, interest parity, price stickiness

JEL Classification: E4, F3, F41

Suggested Citation

Kollmann, Robert, Macroeconomic Effects of Nominal Exchange Rate Regimes: New Insights into the Role of Price Dynamics (April 4, 2001). Available at SSRN: https://ssrn.com/abstract=267495 or http://dx.doi.org/10.2139/ssrn.267495

Robert Kollmann (Contact Author)

ECARES, Université Libre de Bruxelles ( email )

Ave. Franklin D Roosevelt, 50 - C.P. 114
Brussels, B-1050
Belgium

University of Paris XII - Department of Economics ( email )

61 avenue du General de Gaulle
Creteil cedex, 94010
France

HOME PAGE: http://www.robertkollmann.com

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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