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Non-linear real exchange rate effects in the UK labour market

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Author Info
Gabriella Legrenzi () (Keele University, Department of Economics)
Costas Milas () (Keele University, Department of Economics)

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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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Publisher Info
Paper provided by Centre for Economic Research, Keele University in its series Keele Economics Research Papers with number KERP 2005/08.

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Length: 37 pages
Date of creation: Jul 2005
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Publication status: Published in Studies in Nonlinear Dynamics & Econometrics: Vol. 10: No. 1, March 2006, Article 4. http://www.bepress.com/snde/vol10/iss1/art4/
Handle: RePEc:kee:kerpuk:2005/08

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Postal: Department of Economics, University of Keele, Keele, Staffordshire, ST5 5BG - United Kingdom
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Postal: Centre for Economic Research, Research Institute for Public Policy and Management, Keele University, Staffordshire ST5 5BG - United Kingdom
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Related research
Keywords: Real Exchange Rate; Unemployment; Smooth Transition Vector Error Correction Model.;

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Find related papers by JEL classification:
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions
C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation and Testing

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