Exchange rate variability and monetary policy under rational expectations. Some Euro-American experience 1973-1979

Edward J. Bomhoff, Pieter Korteweg

Research output: Contribution to journalArticleResearchpeer-review

14 Citations (Scopus)


We analyze the sources of changes in nominal and real rates of exchange between six European currencies and the U.S. dollar. We conclude that over the period 1973-1979 unexpected changes in the price of oil, together with unanticipated monetary shocks at home or in the U.S. were the most important causes of changes in exchange rates. A multi-state Kalman filter technique is used to compute empirical proxies for unanticipated changes in the exogenous variables. Since both oil price shocks and changes in U.S. monetary trends effect the European currencies in different degrees, it follows that differential domestic rates of inflation are not the only reason why arrangements to restrict exchange rate fluctuations, such as the European Monetary System, may run into trouble.

Original languageEnglish
Pages (from-to)169-206
Number of pages38
JournalJournal of Monetary Economics
Issue number2
Publication statusPublished - 1983
Externally publishedYes

Cite this