The Real Exchange Rate Always Floats
University of Iceland - Faculty of Economics and Business Administration; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute for Economic Research)
CEPR Discussion Paper No. 3376
This Paper makes two main points. First, irrespective of nominal exchange rate arrangements, the real exchange rate always floats - if not through nominal exchange rate adjustment, then through price change. Further, because prices and wages tend to be sticky, the adjustment of real exchange rates towards long-run equilibrium takes time, as witnessed by long-lasting currency misalignments around the world. Second, real exchange rates are likely to fluctuate on their way towards long-run equilibrium because of the dynamic interaction between real exchange rates and the current account; or, put differently, because the structure of lags with which exchange rates impact the volume of exports and imports may give rise to oscillatory behaviour.
Number of Pages in PDF File: 28
Keywords: Flexible exchange rates
JEL Classification: F31working papers series
Date posted: June 20, 2002
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