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Exchange Rates and International Macroeconomics

  • Economics


Real Adjustment and Exchange Rate Dynamics This PDF is a selection from an out-of-print volume from the National Bureau of Economic Research Volume Title: Exchange Rates and International Macroeconomics Volume Author/Editor: Jacob A. Frenkel, ed. Volume Publisher: University of Chicago Press Volume ISBN: 0-226-26250-2 Volume URL: Publication Date: 1983 Chapter Title: Real Adjustment and Exchange Rate Dynamics Chapter Author: J. Peter Neary, Douglas D. Purvis Chapter URL: Chapter pages in book: (p. 285 - 316) 9 Real Adjustment and Exchange Rate Dynamics J. Peter Neary and Douglas D. Purvis The 1970s witnessed numerous events which called into question much of the "accepted wisdom" of macroeconomics as it was perceived at the start of the decade. Stagflation and the resistance of inflation to contrac- tionary policy constituted a major challenge to closed economy mac- roeconomists. For those analysts who focus on open-economy macroeco- nomics, two further phenomena can be added to the list of problems. First, there was a frequent occurrence of sector-specific disturbances or shocks which buffeted many economies and set in motion a variety of perplexing dynamic responses. Most prominent, of course, were distur- bances in the petroleum sector; macroeconomic difficulties were fre- quently encountered in adjusting to oil price increases of foreign origin and, perhaps surprisingly, in adjusting to discoveries of new domestic sources of petroleum products. Second, the volatility of exchange rates following the adoption of a system of flexible exchange rates in the early 1970s has been far greater than expected by most economists who advocated such a system. Of course such variability does not present a prima facie argument that the system failed; indeed, it is possible to argue that the flexibility repre- sented by such variability in the face of an uncertain and unstable interna- tional econom

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