Abstract

Exchange Rate System and Phillips Curve

Following an article by Holtfrerich (Kredit und Kapital, 1982) a lively controversy ensued (see contributions by M. J. M. Neumann, Lang and Ohr and also Holtfrerich in Kredit und Kapital, 1982 and 1983) on whether flexible exchange rates place the Federal Republic of Germany in a position to pursue a more stability-oriented economic policy than was the case under fixed exchange rates. For the evidence presented in this connection, especially the delimination of periods is of decisive importance. In this article it is therefore proposed that a meaningful delimination of periods should be oriented to general foreign trade conditions. Then, for the total period under consideration, 1955 to 1982, we arrive at three subperiods: 1955 to 1958, characterized by limited convertibility and foreign exchange controls; 1959 to 1972, characterized by basically fixed exchange rates; 1973 to 1982, characterized by (restrictedly) flexible exchange rates. During the first and third subperiods, the money supply and hence also the inflation rate of the German economy could be controlled largely by the economic policy-making bodies, while under fixed exchange rates no such control was possible over a long period. On the basis of period delimitation oriented to the general foreign trade data the empirical evidence demonstrates clearly that flexible exchange rates are more suitable for ensuring price level stability coupled with a minimum of unemployment.