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Macroeconomic Adjustment Under Bretton Woods and the Post-Bretton-Woods Float: An Impulse-Response Analysis

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  • Bayoumi, Tamim
  • Eichengreen, Barry

Abstract

We use time-series methods to estimate a simple aggregate supply and demand model in order to analyse the comparative performance of fixed and flexible exchange rate systems and test competing hypotheses designed to explain shifts between exchange rate regimes. The paper provides a coherent explanation of the causes and consequences of the shift from the Bretton Woods System of pegged exchange rates to the post-Bretton-Woods float. The shift from fixed to floating was associated with a modest increase in the cross-country dispersion of supply shocks, but not with an increase in their average magnitude. There was little change in either the cross-country dispersion or the average magnitude of demand shocks. More important in explaining the collapse of Bretton Woods were factors that heightened the impact of shocks on the external account such as the 1958 removal of controls on current account convertibility and the declining effectiveness of capital controls. These factors obliged governments to respond to supply shocks with changes in demand that stabilized prices and the exchange rate at the expense of increased output volatility.

Suggested Citation

  • Bayoumi, Tamim & Eichengreen, Barry, 1992. "Macroeconomic Adjustment Under Bretton Woods and the Post-Bretton-Woods Float: An Impulse-Response Analysis," CEPR Discussion Papers 729, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:729
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    More about this item

    Keywords

    Bretton Woods; Demand Shocks; Economic Adjustment; Exchange Rates; Floating Rates; Regime changes; Supply Shocks;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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