Monetary Independence under Bretton Woods: Perspectives from a Stochastic, Maximizing Model.

Research based on the Kouri-Porter (1974) model of international capital flows suggests that the central banks of nonreserve countries enjoyed considerable monetary independence during the Bretton Woods era. This paper is a theoretical and empirical reassessment of this conclusion. Using a stochastic, maximizing model, it is shown that the existence of imperfect asset substitutability does not guarantee monetary control. At the empirical level, the estimated offset coefficients for four industrialized countries are consistent with zero monetary independence.