The Role of Exchange Rate Movements in Transmitting International Disturbances

Abstract

The post-war period has been characterised by a high degree of interdependence among the industrial countries. Not only have policy changes in the large countries (most notably the very broad swings in monetary and fiscal policies in the United States) had important repercussions on other countries, there have also been large external shocks (especially the massive increases and subsequent decline in oil prices) that have affected individual countries quite differently and that thereby have altered the economic relationships among them. Since the advent of generalised exchange rate floating in 1973, shifts in exchange rates among industrial countries have come to play a central role in bringing about the required adjustment to such shocks. This paper builds on a large theoretical literature and a more limited empirical literature in order to try to clarify that role.