Real Exchange Rate Behaviour under Fixed and Floating Exchange Rate Regimes

17 Pages Posted: 23 Dec 2002  

James R. Lothian

Gabelli School of Business, Fordham University; National Bureau of Economic Research (NBER)

Cornelia H. McCarthy

Gabelli School of Business, Fordham University

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Abstract

In this paper we examine the stability of the real exchange rate and the macroeconomic effects of alternative exchange rate regimes, including currency union, on real exchange rate behaviour. We focus on the Irish punt in order to exploit its diversity of experience over different nominal exchange rate regimes. We make both temporal and cross-country comparisons of real exchange rate stability for the Irish punt with sterling, the US dollar and the German mark. We reach two conclusions on the basis of our results. The first is that for Ireland, as for most other countries, purchasing power parity provides a reasonably good description of actual exchange rate behaviour over the long run. Our second principal conclusion concerns regime effects. Currency union appears to matter. The real exchange rates we analyse are unambiguously less variable under currency union than under alternative exchange rate systems. Otherwise, however, we find no clear-cut differences in behaviour across regimes.

Suggested Citation

Lothian, James R. and McCarthy, Cornelia H., Real Exchange Rate Behaviour under Fixed and Floating Exchange Rate Regimes. The Manchester School, Vol. 70, pp. 229-245, 2002. Available at SSRN: https://ssrn.com/abstract=309312

James R. Lothian (Contact Author)

Gabelli School of Business, Fordham University ( email )

113 West 60th Street
New York, NY 10023
United States
212-636-6147 (Phone)
212-765-5573 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Cornelia H. McCarthy

Gabelli School of Business, Fordham University ( email )

113 West 60th Street
New York, NY 10023
United States
212-636-6139 (Phone)

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