The Mussa Puzzle: A Generalization

Abstract

One of the most compelling pieces of evidence for monetary non-neutrality is the Mussa puzzle, in which the break in the monetary regime when the Bretton Woods System broke down increased the volatility of not only the nominal exchange rate but the real exchange rate. Using data covering thirty-one European countries from 1954 to 2019, I find that the Mussa puzzle is generalizable: any break in a monetary regime that changes the volatility of the nominal exchange rate also changes the volatility of the real exchange rate. This provides further evidence of monetary non-neutrality.