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In August, 1971 the Bretton Woods system of international monetary relations ended, “not with a bang but a whimper”. The so‐called Nixon measures signalled a change of arrangements and attitudes which put the world on notice that the United States was no longer prepared to fill the key role in that system. From that moment forward, makeshift arrangements have provided an uneasy interregnum, while the Committee of Twenty distill from the experience of the past and the wisdom of the present the essence of a new system.

There have been three essays in international monetary reform during the past 40 years. The first was unique in that, at Bretton Woods in 1944, representatives of two nations dominated the planning of a world monetary system which was, in essence, to endure for twenty‐five years. The uniqueness of this lay in the clean start made possible by the vacuum left by the war — an opportunity certainly not to be repeated. The fact that the Bretton Woods system prevailed, with modification and adaptation, for almost as long as the international gold standard testifies to the fact that its planning was not ill done.

The international linkages between money stocks (and inflation rates) has received much attention. Focuses on the advantages and disadvantages of fixed and flexible exchange rate regimes. Fixed rate systems require credible commitments to the rules of the game by the central banks involved. Credible commitment can be achieved through cooperative (symmetric) or coercive (asymmetric) regimes. Did the USA (Germany) dominate other developed (European) countries during the Bretton Woods (European Monetary) system? Examines the linkages, if any, between the USA (German) money stock and money stocks in other developed (European) countries, using the cointegration and error‐correction methodology. Finds evidence that USA (German) money stock did affect other (European) countries′ money stocks during fixed exchange rates. Finds, also, reverse causality which raises serious questions about either the dominance of the USA (Germany) within the Bretton Woods (European Monetary) system, or the usefulness of causality tests is answering such questions.

This paper tests for longrun relationships among the national equity markets of the G'7 countries using the Engle‐Granger two‐step procedure. Results indicate that cointegration is the norm among these seven equity markets in the post‐Bretton Woods period. Further, market adjustments to system equilibria are accelerating as one moves toward the present implying that markets are becoming more integrated.

A number of recent papers have raised serious questions about the validity of the German dominance hypothesis, using Granger (temporal) causality tests. If Germany dominates within the European Monetary System, then German monetary policy, measured by either money stocks or interest rates should Granger (temporally) cause other EMS countries’ monetary policies, but not vice versa. Empirical evidence leads analysts to conclude that the German dominance hypothesis is invalid, or at a minimum, in need of significant reformulation. Explores similar Granger causality tests, using the recent cointegration and error‐correction modelling strategy, for the US and a group of developing countries during the Bretton Woods period, where conventional wisdom suggests that US policy dominated. Finds significant evidence of two‐way causality between the US money stock and the money stocks of a large number of developing countries. These findings raise a serious questions about the interpretation and/or appropriateness of the Granger causality test for investigating policy dominance hypotheses.

The purpose of this paper is to provide an extensive review of the monetary model of exchange rate determination which is the main theoretical framework on analyzing exchange rate behavior over the last 40 years. Furthermore, we test the flexible price monetarist variant and the sticky price Keynesian variant of the monetary model. We conduct our analysis employing a sample of 14 advanced economies using annual data spanning the period 1880–2012.

The theoretical background of the paper relies on the monetary model to the exchange rate determination. We provide a thorough econometric analysis using a battery of unit root and cointegration testing techniques. We test the price-flexible monetarist version and the sticky-price version of the model using annual data from 1880 to 2012 for a group of industrialized countries.

We provide strong evidence of the existence of a nonlinear relationship between exchange rates and fundamentals. Therefore, we model the time-varying nature of this relationship by allowing for Markov regime switches for the exchange rate regimes. Modeling exchange rates within this context can be motivated by the fact that the change in regime should be considered as a random event and not predictable. These results show that linearity is rejected in favor of an MS-VECM specification which forms statistically an adequate representation of the data. Two regimes are implied by the model; the one of the estimated regimes describes the monetary model whereas the other matches in most cases the constant coefficient model with wrong signs. Furthermore it is shown that depending on the nominal exchange rate regime in operation, the adjustment to the long run implied by the monetary model of the exchange rate determination came either from the exchange rate or from the monetary fundamentals. Moreover, based on a Regime Classification Measure, we showed that our chosen Markov-switching specification performed well in distinguishing between the two regimes for all cases. Finally, it is shown that fundamentals are not only significant within each regime but are also significant for the switches between the two regimes.

The results are of interest to practitioners and policy makers since understanding the evolution and determination of exchange rates is of crucial importance. Furthermore, our results are linked to forecasting performance of exchange rate models.

The present analysis extends previous analyses on exchange rate determination and it provides further support in favor of the monetary model as a long-run framework to understand the evolution of exchange rates.

We are today in the middle of the greatest economic catastrophe – the greatest catastrophe due almost entirely to economic causes – of the modern world…I see no reason to be in the slightest degree doubtful about the initiating causes of the slump….The leading characteristic was an extraordinary willingness to borrow money for the purposes of new real investment at very high rates of interest – rates of interest which were extravagantly high on pre-war standards, rates of interest which have never in the history of the world been earned, I should say, over a period of years over the average of enterprise as a whole. This was a phenomenon which was apparent not, indeed, over the whole world but over a very large part of it.– John Maynard Keynes (First of the Harris Foundation Lectures, 1931)