The Endogeneity of Fixed Exchange Rates
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This chapter starts by offering some evidence on the behavior of flexible exchange rates after the collapse of the Bretton Woods system in 1973. That will be the basis for deriving the position of the tradable and non-tradable goods producing sectors with regard to flexible exchange rates. Some of the arguments resemble those in the preceding chapter but will be treated in more detail here. Moreover, aspects enter which were absent in the nineteenth century. As already indicated in the second chapter, the role of monetary policy has been transformed tremendously during the last century. The recognition of the potentially stabilizing role of monetary policy and the assignment of the task of securing full employment to it went hand in hand with the democratization of society and thus the heightened dependency of governments from widespread public support. The process of "nationalizing" central banks has given governments probably more direction over the monetary process than in the nineteenth century where many central banks were still privately owned. This process has only changed in the recent years in the European Union (EU) and other regions of the world, whereas earlier, disregarding some notable exceptions, most of the central banks have been under the direct control of governments. In this aspect the Keynesian revolution and the output stabilizing role assigned to central banks after the second world war has made this policy change even more forceful since the central banks were directly subject to political influences. The neoclassic revolution and the impotence of monetary policy stressed there, in contrast, had less impact on the political environment than on economic theory. Day to day discussions still assign an output stabilizing role to central banks and monetary policy.