Exchange Rate Disconnect in a Standard Open-Economy Macro Model
AbstractThis paper demonstrates that the well-documented exchange rate disconnect can be explained within traditional exchange rate models. It is shown that even if the underlying fundamentals are invariant across exchange rate regimes, equilibrium real exchange rates are more volatile under flexible nominal exchange rates than under fixed rates. In particular, fixed rates reduce the requisite adjustments of the real exchange rate in response to both nominal and real shocks relative to a floating-rate scenario. Copyright Springer Science + Business Media, Inc. 2005
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Bibliographic InfoArticle provided by Springer in its journal Open Economies Review.
Volume (Year): 16 (2005)
Issue (Month): 3 (July)
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Web page: http://www.springerlink.com/link.asp?id=100323
exchange rate volatility; exchange rate regime; nominal and real shocks;
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