On the Relative Bias of Flexible Exchange Rates

Michael Sumner and G. Zis

Chapter 8 in European Monetary Union, 1982, pp 168-190 from Palgrave Macmillan

Abstract: Abstract The major industrialised countries have substituted the reduction of the inflation rate for ‘full’ employment as their principal economic policy objective. In pursuit of a lower rate of change of prices they have allowed their unemployment rates to increase to levels that would not have been considered politically possible as recently as a decade ago. It is arguable, however, that further increases in unemployment, or even maintenance of current levels for an extended period of time, would impose costs which would be unacceptable in both economic and political terms. It may, therefore, be asked whether European Monetary Union, apart from any other advantages it may offer, can facilitate the reduction of member countries’ inflation rates at a relatively lower cost in terms of both short- and long-run unemployment. The answer to this question rests on an assessment of the inflation bias of flexible relative to fixed exchange rates. In our discussion of the inflationary bias of alternative exchange rate regimes we shall consider, in contrast to other studies that have addressed this question, the impact of exchange-rate flexibility not only on policy-makers’ preferences but also on the constraints that face them. That is, we shall argue that the relative inflation bias of flexible exchange rates is at least partially dependent on how the short-run trade-off between the inflation rate and unemployment, and therefore the natural rate of unemployment, is affected if exchange rates are allowed to be freely determined in the foreign exchange markets.

Keywords: Exchange Rate; Inflation Rate; Flexible Exchange Rate; European Monetary; European Monetary System (search for similar items in EconPapers)
Date: 1982
References: Add references at CitEc
Citations:

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pal:palchp:978-1-349-16781-4_11

Ordering information: This item can be ordered from
http://www.palgrave.com/9781349167814

DOI: 10.1007/978-1-349-16781-4_11

Access Statistics for this chapter

More chapters in Palgrave Macmillan Books from Palgrave Macmillan
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().