Abstract
The recurring oil-price shocks that hit all economies in the world provide an opportunity to empirically test Friedman's hypothesis that flexible exchange regimes better absorb real external shocks. Using a sample of nine of the OECD's major oil-importing countries and Reinhart and Rogoff's de facto classification of exchange rate regimes, this paper examines whether the response of real output, prices, interest rate, and the real exchange rate to real oil-price shocks differ across exchange rate regimes. The results show that price level and the real exchange rate exhibit smoother adjustment to their long-run equilibrium when the de facto exchange rate regime was flexible. The paper also finds feedback from the real effective exchange rate and inflation rate to the domestic-currency real oil-price, supporting the growing notion that oil-price shocks are not purely exogenous to developed economies.
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