Flexible Exchange Rates and Insulation: A Reexamination

  • Joachim Fels
Conference paper
Part of the A Publication of the Egon-Sohmen-Foundation book series (EGON-SOHMEN)


Will a country embedded in an integrated world economy be able to completely insulate its economy from foreign economic disturbances by letting its currency float freely in the foreign exchange market? Both theoretical considerations and actual experience after the movement to flexible exchange rates among the major currencies in 1973 suggest that the answer is negative. According to conventional wisdom, however, the early advocates of flexible exchange rates believed in the ability of floating rates to perfectly insulate an economy from disturbances originating abroad. This conventional wisdom is frequently cited to show that the case for flexible exchange rates may not be as strong as it originally seemed to be, since part of the case appears to have rested on an erroneous belief.


Exchange Rate Monetary Policy Business Cycle Inflation Rate Money Supply 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.


Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.


  1. Baxter, Marianne, and Alan C. Stockman. 1989. “Business Cycles and the Exchange-Rate Regime: Some International Evidence.” Journal of Monetary Economics 23: 377–400.CrossRefGoogle Scholar
  2. Behnke, Ernst-August. 1980. “International Transmission of Business Cycles — The Sohmen-Laursen-Metzler Effect.” In John S. Chipman and Charles P. Kindleberger, eds., Flexible Exchange Rates and the Balance of Payments: Essays in Memory of Egon Sohmen. Amsterdam: North-Holland, 257–66.Google Scholar
  3. Bordo, Michael D., and Anna J. Schwartz. 1988. “Transmission of Real and Monetary Disturbances Under Fixed And Floating Exchange Rates.” Cato Journal 8: 451–72.Google Scholar
  4. Cantor, Richard, and Nelson C. Mark. 1988. “The International Transmission of Real Business Cycles.” International Economic Review 29: 493–507.CrossRefGoogle Scholar
  5. Choudhri, Ehsan U., and Levis A. Kochin. 1980. “The Exchange Rate and the International Transmission of Business Cycle Disturbances.” Journal of Money, Credit, and Banking 12: 565–74.CrossRefGoogle Scholar
  6. Cooper, Richard N. 1985. “Economic Interdependence and Coordination of Economic Policies.” In Ronald W. Jones and Peter B. Kenen, eds., Handbook of International Economics. Vol. II. Amsterdam: North-Holland, 1195–1234.Google Scholar
  7. Corden, W. Max. 1985a. Inflation, Exchange Rates, and the World Economy. 3rd edition. Chicago: University of Chicago Press.Google Scholar
  8. Corden, W. Max. 1985b. “On Transmission and Coordination Under Flexible Exchange Rates.” In Willem H. Buiter and Richard C. Marston, eds., International Economic Policy Coordination. Cambridge: Cambridge University Press, 8–24.Google Scholar
  9. Darby, Michael R., and James R. Lothian. 1989. “The International Transmission of Inflation Afloat.” In Michael D. Bordo, ed., Money, History, and International Finance: Essays in Honor of Anna J. Schwartz. Chicago: The University of Chicago Press, 203–36.Google Scholar
  10. Dornbusch, Rudiger. 1983. “Flexible Exchange Rates and Interdependence.” IMF Staff Papers 30: 3–30.CrossRefGoogle Scholar
  11. Everaet, Luc. 1988. “International Aspects of Business Cycles: Some Evidence and a Consistent Theoretical Framework.” Graduate Institute of International Studies, Geneva, Discussion Papers in International Economics, November.Google Scholar
  12. Feldstein, Martin, and Charles Horioka. 1980. “Domestic Saving and International Capital Flows.” Economic Journal 90: 314–29.CrossRefGoogle Scholar
  13. Feldstein, Martin, and Charles Horioka, and Phillipe Bacchetta. 1989. “National Saving and International Investment.” NBER Working Paper No. 3164.Google Scholar
  14. Fleming, J. Marcus. 1962. “Domestic Financial Policies Under Fixed and Under Floating Exchange Rates.” IMF Staff Papers 9: 369–80.CrossRefGoogle Scholar
  15. Frankel, Jeffrey A. 1989. “Quantifying International Capital Mobility in the 1980s.” NBER Working Paper No. 2856.Google Scholar
  16. Frenkel, Jacob A., and Assaf Razin. 1987. “The Mundell-Fleming Model A Quarter Century Later.” IMF Staff Papers 34: 567–620.CrossRefGoogle Scholar
  17. Friedman, Milton. 1953. “The Case for Flexible Exchange Rates.” In Milton Friedman, Essays in Positive Economics. Chicago: University of Chicago Press, 157–203.Google Scholar
  18. Friedman, Milton, and Anna J. Schwartz. 1982. Monetary Trends in the United States and the United Kingdom. Chicago: The University of Chicago Press.Google Scholar
  19. Gerlach, Stefan H.M. 1988. “World Business Cycles Under Fixed and Flexible Exchange Rates.” Journal of Money, Credit, and Banking 20: 621–32.CrossRefGoogle Scholar
  20. Giersch, Herbert. 1989. “Anmerkungen zum weltwirtschaftlichen Denkansatz.” Weltwirtschaftliches Archiv 125: 1–16.CrossRefGoogle Scholar
  21. de Grauwe, Paul and Michele Fratianni. 1984. “Economic Interdependence Since the Early Seventies.” Catholic University of Louvain, International Economics Research Paper, No. 43.Google Scholar
  22. Haberler, Gottfried. 1937. Prosperity and Depression. Geneva: League of Nations.Google Scholar
  23. Huber, Gérard and Nasser Saidi. 1983. “Postwar Business Cycles and Exchange Rate Regimes: Issues and Evidence.” Paper presented at the Konstanz Seminar on Monetary Theory and Monetary Policy, May 31-June 3, mimeo.Google Scholar
  24. Johnson, Harry G. 1969. “The Case for Flexible Exchange Rates, 1969.” Federal Reserve Bank of St. Louis Review 51 (6): 12–24.Google Scholar
  25. Laursen, Svend, and Lloyd A. Metzler. 1950. “Flexible Exchange Rates and the Theory of Employment.” Review of Economics and Statistics 32: 281–99.CrossRefGoogle Scholar
  26. Meade, James E. 1951. The Theory of International Economic Policy, Vol. I: The Balance of Payments. London: Oxford University Press.Google Scholar
  27. Mundell, Robert A. 1968. International Economics. New York: Macmillan Press.Google Scholar
  28. Mussa, Michael. 1979. “Macroeconomic Interdependence and the Exchange Rate Regime.” In Rudiger Dornbusch and Jacob A. Frenkel, eds., International Economic Policy: Theory and Policy. Baltimore: Johns Hopkins University Press, 160–204.Google Scholar
  29. Ripley, Duncan M. 1978. “The Transmission of Fluctuations in Economic Activity: Some Recent Evidence.” In Federal Reserve Bank of Boston, ed., Managed Exchange Rate Flexibility: The Recent Experience. Boston, Mass.: Federal Reserve Bank of Boston, 1–22.Google Scholar
  30. Sohmen, Egon 1961. Flexible Exchange Rates: Theory and Controversy. Chicago: University of Chicago Press.Google Scholar
  31. Sohmen, Egon 1969. Flexible Exchange Rates. Revised edition. Chicago: University of Chicago Press.Google Scholar
  32. Sohmen, Egon 1974. “Exchange Rates, Terms of Trade and Employment: Pitfalls in Macroeconomic Models of Open Economies.” Kyklos 27: 521–36.CrossRefGoogle Scholar
  33. Swoboda, Alexander K. 1983. “Exchange Rate Regimes and European-U.S. Policy Interde-pendence.” IMF Staff Papers 30: 75–102.CrossRefGoogle Scholar

Copyright information

© Springer-Verlag Berlin · Heidelberg 1992

Authors and Affiliations

  • Joachim Fels

There are no affiliations available

Personalised recommendations