Price flexibility and output volatility: the case for flexible exchange rates

This paper uses descriptive statistics and regression analyses to esamine the relationship between exchange rate variability and output volatility in developed countries based on 1961 to 1984 data. The results indicate that a flexible exchange rate system is associated with less, not more, dispersion in output growth across industrialized countries despite a more turbulent global environment. Also, countries which have more exchange rate volatility experience less output volatility. The relationship appears not to be spurious. The results are consistent with the idea that an increase in price flexibility does not destabilize output.