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Real Exchange Rate Adjustment in and out of the Eurozone

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  • Martin Berka
  • Michael B. Devereux
  • Charles Engel

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.

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/aer.102.3.179
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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 102 (2012)
Issue (Month): 3 (May)
Pages: 179-85

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Handle: RePEc:aea:aecrev:v:102:y:2012:i:3:p:179-85

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  1. Martin Berka & Michael B. Devereux, 2010. "What Determines European Real Exchange Rates?," NBER Working Papers 15753, National Bureau of Economic Research, Inc.
  2. Michael Devereux & Charles Engel, 2000. "Monetary Policy in the Open Economy Revisited: Price Setting and Exchange Rate Flexibiity," Discussion Papers in Economics at the University of Washington 0016, Department of Economics at the University of Washington.
  3. Engel, C., 1996. "Accounting for U.S. Real Exchange Rate Changes," Working Papers 96-02, University of Washington, Department of Economics.
  4. Charles Engel, 2009. "Currency Misalignments and Optimal Monetary Policy: A Reexamination," NBER Working Papers 14829, National Bureau of Economic Research, Inc.
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Cited by:
  1. Jonathan Heathcote & Fabrizio Perri, 2013. "Assessing International Efficiency," NBER Working Papers 18956, National Bureau of Economic Research, Inc.
  2. Jarko Fidrmuc & Caroline Klein & Robert W.R. Price & Andreas Wörgötter, 2013. "Slovakia: A Catching Up Euro Area Member In and Out of the Crisis," OECD Economics Department Working Papers 1019, OECD Publishing.
  3. Michael B Devereux & James Yetman, 2014. "Globalisation, pass-through and the optimal policy response to exchange rates," BIS Working Papers 450, Bank for International Settlements.
  4. Jarko Fidrmuc & Andreas Wörgötter, 2013. "Slovakia: The Consequences of Joining the Euro Aea before the Crisis for a Small Catching-up Economy," CESifo Forum, Ifo Institute for Economic Research at the University of Munich, vol. 14(1), pages 57-63, 05.
  5. Paul R. Bergin & Reuven Glick & Jyh-Lin Wu, 2012. "Mussa Redux and Conditional PPP," NBER Working Papers 18331, National Bureau of Economic Research, Inc.
  6. Martin Berka & Michael B. Devereux, 2013. "Trends in European real exchange rates," Economic Policy, CEPR & CES & MSH, vol. 28(74), pages 193-242, 04.

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