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Non-linear Real Exchange Rate Effects in the UK Labour Market

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  • Milas Costas

    ()
    (Keele University)

  • Legrenzi Gabriella

    ()
    (Keele University)

Abstract

Using UK data over the 1973q1-2004q1 period, we find that the dynamics of the real exchange rate, real wages and unemployment vary both with large versus small real exchange rate disequilibria and rising versus falling unemployment regimes. The short-run real exchange rate adjusts only when large disequilibrium deviations occur. We report fast real exchange rate adjustment in periods of falling unemployment. This implies that prices and wages are more flexible when real output is high. When the real exchange rate is highly undervalued, workers respond to an improvement in domestic competitiveness by demanding and getting higher wages. Unemployment is reduced following gains in competitiveness when the real exchange rate is further away from equilibrium.

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Bibliographic Info

Article provided by De Gruyter in its journal Studies in Nonlinear Dynamics & Econometrics.

Volume (Year): 10 (2006)
Issue (Month): 1 (March)
Pages: 1-34

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Handle: RePEc:bpj:sndecm:v:10:y:2006:i:1:n:4

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Cited by:
  1. David Ubilava & Matt Holt, 2013. "El Niño southern oscillation and its effects on world vegetable oil prices: assessing asymmetries using smooth transition models," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 57(2), pages 273-297, 04.
  2. Serra, Teresa & Zilberman, David & Gil, Jose Maria & Goodwin, Barry K., 2008. "Nonlinearities in the US corn-ethanol-oil price system," 2008 Annual Meeting, July 27-29, 2008, Orlando, Florida 6512, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).

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