International Transmission Under Bretton Woods

Abstract

This paper explores the main channels of international transmission of economic disturbances under the Bretton Woods System and presents evidence on the short-run international transmission of inflation under that system. There appears to have been little short-run international transmission of inflation. Countries with one-percent higher money-growth rates subsequently had one-fourth to one-half percent higher inflation and a (predictably) lower real interest rate. This probably reflects effects of money growth on inflation and interest rates rather than reverse causation: the natural interpretation of the evidence is that countries had some scope for monetary-policy independence under Bretton Woods, despite pegged exchange rates, and exercised that independence in ways that limited international transmission.