AND

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. This paper examines the historical relationship between exchange rate variability and output volatility using multiple country data. The objective is to determine empirically (i) whether flexible exchange rates help an economy to absorb shocks, or make matters worse, and (ii) whether output gro\vth becomes more, or less, diverse across countries after a switch to a flexible exchange rate system.l The authors also hope that the results shed light on the relationship between price flexibility and output stability. This research is inspired by the assertion (Friedman, 1953) that a flexible exchange rate system is better than a fixed exchange rate system in helping an economy to adjust to shocks. It is also inspired by the assertion (Kindleberger, 1969) that flexible exchange rates lead to more segmentation of the world market for goods and capital. After more than one and a half decades of floating exchange rate experience, the time has come to examine the empirical validity of these assertions. This research is also stimulated by the recent articles of De Long and Summers (1986b) and Driskill and Sheffrin (1986), which discuss the relationship between price flexibility and the stability of output. The understanding of this issue can be improved by using empirical evidence. We believe that a reliable piece of empirica