The Real Exchange Rate Always Floats
AbstractThis 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. Second, real exchange rates are 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.
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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3376.
Date of creation: May 2002
Date of revision:
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Other versions of this item:
- F31 - International Economics - - International Finance - - - Foreign Exchange
This paper has been announced in the following NEP Reports:
- NEP-ALL-2003-03-14 (All new papers)
- NEP-IFN-2003-03-14 (International Finance)
- NEP-RMG-2003-03-14 (Risk Management)
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