Business cycles and the exchange-rate regime

This paper investigates the differences in time series behavior of key economic aggregates under alternative exchange-rate systems. We use a postwar sample of 49 countries to compare the behavior of output, consumption, trade flows, government consumption spending, and real exchange rates under alternative exchange-rate systems (pegged, floating, and cooperative systems such as the EMS). We then examine evidence from two particular episodes, involving Canada and Ireland, of changes in the exchange-rate system. Aside from greater variability of real exchange rates under flexible than under pegged nominal exchange-rate systems, we find little evidence of systematic differences in the behavior of macroeconomic aggregates or international trade flows under alternative exchange-rate systems. These results are of interest because a large class of theoretical models implies that the nominal exchange-rate system has important effects on a number of macroeconomic quantities.