Working Paper: CEPR ID: DP4487
Authors: Robert Kollmann
Abstract: This Paper analyses the effects of pegged and floating exchange rates using a two-country dynamic general equilibrium model that is calibrated to the US 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 US 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 US and European output has been higher in the floating-rate era.
Keywords: international macroeconomics; monetary economics
JEL Codes: E40; F30; F40
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| nominal exchange rate volatility (F31) | real exchange rate volatility (F31) |
| nominal exchange rate volatility (F31) | US and European output volatility (N13) |
| exchange rate regimes (F33) | correlation between US and European output (N14) |
| UIP shocks (J65) | nominal exchange rate volatility (F31) |
| UIP shocks (J65) | real exchange rate volatility (F31) |
| price stickiness (L11) | correlation between US and European output (N14) |