Working Paper: CEPR ID: DP452
Authors: Barry Eichengreen
Abstract: This paper documents the effects of exchange rates and the external constraint during the interwar years. In the absence of international policy coordination, exchange rate depreciation is shown to have been a necessary precondition for the adoption of policies promoting recovery from the Great Depression. But currency depreciation was not without costs. It increased the variability of nominal exchange rates and rendered them increasingly difficult to predict. Increased variability and uncertainty about nominal exchange rates carried over to short-term changes in real exchange rates as well. Thus, exchange rate variability appears to have introduced additional noise into the operation of the price mechanism.
Keywords: exchange rates; balance of payments; interwar years
JEL Codes: 431; 044
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Currency devaluation (F31) | Economic recovery (E65) |
| Currency devaluation (F31) | Adoption of reflationary policies (E65) |
| Adoption of reflationary policies (E65) | Economic recovery (E65) |
| Increased variability of nominal exchange rates (F31) | Predictability of real exchange rates (F31) |