DP452 Relaxing the External Constraint: Europe in the 1930s

Author(s): Barry Eichengreen
Publication Date: August 1990
Keyword(s): Balance of Payments, Exchange Rates, Interwar Years
JEL(s): 044, 431
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=452

This paper documents the effects of exchange rates and the external constraint during the interwar years. In the absence of international policy coordination, exchange rate depreciation is shown to have been a necessary precondition for the adoption of policies promoting recovery from the Great Depression. But currency depreciation was not without costs. It increased the variability of nominal exchange rates and rendered them increasingly difficult to predict. Increased variability and uncertainty about nominal exchange rates carried over to short-term changes in real exchange rates as well. Thus, exchange rate variability appears to have introduced additional noise into the operation of the price mechanism.