Real Exchange Rate Adjustment In and Out of the Eurozone

7 Pages Posted: 6 Jun 2013

See all articles by Martin Berka

Martin Berka

School of Economics and Finance, Massey University; Open-economy macroeconomics programme, CAMA, ANU; Asian Bureau of Finance and Economic Research

Michael B. Devereux

University of British Columbia (UBC) - Department of Economics; Centre for Economic Policy Research (CEPR)

Charles M. Engel

University of Wisconsin - Madison - Department of Economics; National Bureau of Economic Research (NBER); University of Washington - Department of Economics

Date Written: May 1, 2012

Abstract

It is often suggested that currency unions unduly inhibit the efficient adjustment of real exchange rates. Recently, this has been seen as a key failure of the Eurozone. This paper presents evidence that throws doubt on this conclusion. Our evidence suggests that real exchange rate movement within the Eurozone was at least as compatible with efficient adjustment as the behavior of real exchange rates for the floating rate countries outside the Eurozone. This interpretation is consistent with a model in which nominal exchange rate movements give rise to persistent deviations from the law of one price in traded goods.

Keywords: Real exchange rates, Eurozone

JEL Classification: F31, F33

Suggested Citation

Berka, Martin and Devereux, Michael B. and Engel, Charles M., Real Exchange Rate Adjustment In and Out of the Eurozone (May 1, 2012). American Economic Review, Vol. 102, No. 3, 2012, Available at SSRN: https://ssrn.com/abstract=2274481

Martin Berka (Contact Author)

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Open-economy macroeconomics programme, CAMA, ANU

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