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

Anne Gulde and Holger Wolf

No 1991/124, IMF Working Papers from International Monetary Fund

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.

Keywords: WP; exchange rate; nominal exchange rate; regime neutrality; market price; disequilibrium nominal exchange rate movement; I. nominal exchange rate variability; series x; variability measure; goods market; price behavior; Real exchange rates; Exchange rates; Exchange rate arrangements; Exchange rate flexibility; Gold; Europe (search for similar items in EconPapers)
Pages: 74
Date: 1991-12-01
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