Post-war Reconstruction
Lessons from France

French economic policy during the Fourth Republic was based in theory on commitment to full participation in the IMF and the GATT, while in practice the burden of post-war reconstruction led to repeated devaluations in the late 1940s and trade controls thereafter. In Discussion Paper No. 799, Research Fellow Gilles Saint-Paul applies modern macroeconomic analysis to investigate this experience, which may provide valuable lessons for the transforming economies of Central and Eastern Europe.

Saint-Paul uses the theory of collapsing exchange rate regimes to assess the relative importance of the factors that triggered the crises and identify the channels through which they took effect. Capital controls left room for speculation, in particular through imports of durables, while inflation differentials led to deviations from purchasing power parity. These were the greatest driving force behind the crises, although expectations of loose monetary policy and changes in world interest rates also played important roles. He also develops an intertemporal model of the balance of payments to show that a higher real exchange rate would have eased the import of capital goods and sustained consumption smoothing; trade controls also generated efficiency losses and slowed reconstruction.

Saint-Paul concludes that the fixed exchange rate policy was ineffective in preventing inflation, while the capital and trade controls used to defend it damaged growth. Higher foreign borrowing could have increased output and welfare substantially: consumption smoothing was inadequate while inefficient financial markets and political uncertainty restricted private investment. Monetary instability might have prevented foreign borrowing and investment from attaining their `optimal' levels, since private agents would probably have misread the initially `excessive' levels of public spending devoted to reconstruction as evidence of the government's `weak' commitment to anti-inflationary discipline.

Real and Monetary Aspects of French Exchange Rate Policy Under the Fourth Republic
Gilles Saint-Paul

Discussion Paper No. 799, August 1993 (IM)