Why dont macroeconomic quantities respond to exchange rate variability?

Empirical studies comparing fixed and flexible exchange rate regimes document that countries moving from pegged to floating systems experience a systematic and dramatic rise in the variability of the real exchange rate. However, there is very little evidence that the behavior of other macroeconomic variables varies systematically with the exchange rate regime. This paper seeks to resolve this puzzle. We examine the effects of the exchange rate regime in a dynamic general equilibrium model with nominal goods prices set in the buyerʹs currency and incomplete asset markets. The model predicts a sharp increase in the volatility of the real exchange rate when moving from pegged to floating rates, while this pattern is not observed for other variables. The model also predicts a higher commovement of variables across countries under fixed rather than under flexible rates, a prediction that accords with recent empirical studies.