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The Real Exchange Rate Always Floats

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Author Info
Thorvaldur Gylfason

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Abstract

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. In second place, real exchange rates are rather 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. Copyright Blackwell Publishers Ltd/University of Adelaide and Flinders University of South Australia 2002.

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File URL: http://www.blackwell-synergy.com/links/doi/10.1111/1467-8454.00171
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Article provided by Blackwell Publishing in its journal Australian Economic Papers.

Volume (Year): 41 (2002)
Issue (Month): 4 (December)
Pages: 369-381
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Handle: RePEc:bla:ausecp:v:41:y:2002:i:4:p:369-381

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  1. Bruno, Michael & Easterly, William, 1998. "Inflation crises and long-run growth," Journal of Monetary Economics, Elsevier, vol. 41(1), pages 3-26, February. [Downloadable!] (restricted)
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  2. Peel, David & Sarno, Lucio & Taylor, Mark P, 2001. "Nonlinear Mean-Reversion in Real Exchange Rates: Towards a Solution to the Purchasing Power Parity Puzzles," CEPR Discussion Papers 2658, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  3. Jeffrey A. Frankel, 1999. "No Single Currency Regime is Right for All Countries or At All Times," NBER Working Papers 7338, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June. [Downloadable!] (restricted)
  5. Fischer, Stanley, 1993. "The role of macroeconomic factors in growth," Journal of Monetary Economics, Elsevier, vol. 32(3), pages 485-512, December. [Downloadable!] (restricted)
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  6. Mark P. Taylor, 2003. "Purchasing Power Parity," Review of International Economics, Blackwell Publishing, vol. 11(3), pages 436-452, 08. [Downloadable!] (restricted)
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Cited by:
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  1. Himanshu Joshi, 2008. "The Fundamental Equilibrium Real ExchangeRate in India : An Approach to Estimation and Measurement of Misalignment," Working Papers id:1345, esocialsciences.com. [Downloadable!]
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This page was last updated on 2009-11-22.

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