Working Paper: NBER ID: w1035
Authors: Rudiger Dornbusch
Abstract: The paper was prepared for the NBER-IMF conference on Exchange Rate Policy and Interdependence. It reviews the experience with flexible exchange rates and the main policy alternatives that have been suggested. The theoretical part develops a modern open economy macro model with an emphasis on capital mobility, real and nominal wage stickiness and expectations. The impact of disturbances is discussed in terms of the underlying structure, in particular, the relative role of real and nominal inflexibility. Among the main policy alternatives the paper reviews the McKinnon proposal for world monetarism, and the band proposal. Both of these schemes are found unsatisfactory in coping with the chief problem of the current systems namely how to cope with the transition to low inflation. The alternative of capital controls, likewise, would not avoid the adverse consequences of monetary stabilization it would only influence the particular details of the international transmission.
Keywords: Flexible Exchange Rates; Interdependence; Monetary Policy; Capital Mobility
JEL Codes: F31; F33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| flexible exchange rates (F31) | national autonomy in monetary policy (E58) |
| flexible exchange rates (F31) | excessive exchange rate volatility (F31) |
| excessive exchange rate volatility (F31) | macroeconomic instability (E60) |
| flexible exchange rates (F31) | global inflation trends (E31) |
| interventions in exchange rates (F31) | stabilize adverse effects of monetary policy dislocations (E63) |
| wage stickiness (J31) | overshooting in employment (J63) |
| cyclical changes (E32) | responsiveness of wages (J31) |
| external economic shocks (F41) | overshooting in exchange rates (F31) |