Experience with Exchange
Rate Flexibility
Roland Vaubel
For any student of exchange-rate flexibility in the 1970s, West Germany and Switzerland must be of particular interest. Switzerland was the first European country to let its currency float indefinitely (in January 1973) as well as to return to an exchange-rate target (in October 1978). Germany was the first European country to experiment with flexible exchange rates (in fall 1969 and again from May to December 1971). It followed Switzerland into "permanent" exchange-rate flexibility toward the dollar and most other currencies with a lag of two months; and with the same lag it reestablished exchange-rate targets for major European Community (EC) currencies in December 1978 (in the context of the European Monetary System).
Both the Swiss franc (SF) and the deutsche mark (DM) experienced a considerable appreciation in the exchange markets: The annual compound average rate of effective appreciation (MERM) from 1973I to 1979111 amounted to 9.8 percent for the franc and 6.2 percent for the mark. The nominal appreciation primarily reflected the fact that, at 3.7 percent and 4.6 percent, respectively, annual consumer price inflation in Switzerland and Germany was much lower than in all other major industrial countries. But there was also a real effective appreciation on a consumer price basis: 3.7 percent per year for the franc and 0.8 percent per year for the mark; the real appreciation was 0.9 percent and 1.2 percent, respectively, in the period 1966II-1972IV.1
____________________I thank Jacqueline Rijsdijk, Cees Bangma, and especially Fred Bär for highly competent research assistance; Eduard Bomhoff for helping to organize the computational work; and Hans Genberg, Georg Junge, Heinz Müller, and the Bank for International Settlements for kindly supplying urgently needed data.
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