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Non-linear multivariate adjustment of the UK real exchange rate

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Author Info
Costas Milas (Department of Economics, City University, London)

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Abstract

Based on a multivariate non-linear model, this paper recognises an important role for the real exchange rate in affecting UK labour market conditions. The short-run real exchange rate adjusts quickly to disequilibrium deviations of the real exchange rate from its long-run level outside a rather wide interval band. When the real exchange rate is undervalued, short-run unemployment falls as firms respond to an improvement in domestic competitiveness by increasing their demand for labour. Further, there is a strong response of short-run unemployment to the disequilibrium error outside a narrow interval band. To the extent that the real exchange rate equation reflects monetary policy considerations, our results imply that unemployment can be targeted by economic policy. Furthermore, if economic authorities want to avoid large swings in unemployment then they should be prepared to intervene in exchange markets with the aim of keeping real exchange rate movements within a narrow interval band.

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Publisher Info
Paper provided by Department of Economics, City University, London in its series City University Economics Discussion Papers with number 03/08.

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Length: 27 pages
Date of creation: 10 Nov 2003
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Handle: RePEc:cty:dpaper:0308

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Postal: Northampton Square, LONDON EC1V 0HB
Web page: http://www.city.ac.uk/economics
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Related research
Keywords: Real exchange rate Traded goods Smooth Transition Vector Error Correction Model

Find related papers by JEL classification:
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models
C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation and Testing
F30 - International Economics - - International Finance - - - General
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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    Other versions:
  15. Ivan Paya & David A. Peel, 2003. "Purchasing Power Parity Adjustment Speeds in High Frequency Data when the Equilibrium Real Exchange Rate is Proxied by a Deterministic Trend," Manchester School, University of Manchester, vol. 71(Supplemen), pages 39-53, 09. [Downloadable!] (restricted)
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