Sticky Exchange Rates and Flexible Prices: A Heretic View from the Interwar Period

74 Pages Posted: 15 Feb 2006

See all articles by Anne-Marie Gulde

Anne-Marie Gulde

International Monetary Fund (IMF)

Date Written: December 1991

Abstract

Real exchange rate variability tends to be higher under flexible than under fixed exchange rates. The neokeynesian view attributes the higher variability to the combination of volatile nominal exchange rates with sticky prices. The neoclassical approach regards an increased incidence of real shocks as the culprit. We test the crucial assumptions underlying the two models for the interwar period. Prices and exchange rates are found to be equally flexible. We hence reject the neokeynesian sticky price view for our sample period. In contrast, our results are consistent with, while not constituting evidence for, the neoclassical equilibrium approach.

JEL Classification: E31, F33, N24

Suggested Citation

Gulde, Anne-Marie, Sticky Exchange Rates and Flexible Prices: A Heretic View from the Interwar Period (December 1991). IMF Working Paper No. 91/124, Available at SSRN: https://ssrn.com/abstract=885164

Anne-Marie Gulde (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

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