Are flexible exchange rates really more volatile? Evidence form the early 1900s.

The volatility of the British pound with respect to the US dollar is examined for the period 1900-40 to ascertain how changes in exchange arrangements affect uncertainty faced by users of the foreign exchange market. Although, on average, volatility of the real exchange rate is higher during flexible regime periods, this proves to be the result of an 'explosion' of volatility at the start of the flexible regime periods. Volatility settles down to those levels experienced during fixed exchange regime periods after a period of time. These results were obtained using a GARCH measure of volatility. [ABSTRACT FROM AUTHOR]