MACROECONOMIC ADJUSTMENT UNDER BRETTON-WOODS AND THE POST-BRETTON-WOODS FLOAT - AN IMPULSE-RESPONSE ANALYSIS

We analyse the comparative macroeconomic performance of the Bretton Woods System of pegged exchange rates and the post-Bretton Woods float. The change in volatility of prices and output following the shift to floating does not appear to have been associated with differences in underlying aggregate-supply and aggregate-demand shocks. Rather, under fixed rates, monetary policy had to be adjusted to stabilise the exchange rate, flattening the demand curve and thereby increasing the output response and reducing the price response to aggregate supply shocks. Following the shift to floating, monetary policy was freed, steepening the demand curve and increasing price volatility relative to output volatility.