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

26 Pages Posted: 16 Aug 2004

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: July 2004

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 or 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 correlation between U.S. and European output has been higher in the floating-rate era.

Keywords: International macroeconomics, monetary economics

JEL Classification: E40, F30, F40

Suggested Citation

Kollmann, Robert, Macroeconomic Effects of Nominal Exchange Rate Regimes: New Insights into the Role of Price Dynamics (July 2004). Available at SSRN: https://ssrn.com/abstract=576962

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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