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Real Exchange Rate Adjustment in and out of the Eurozone

Author

Listed:
  • Martin Berka
  • Michael B. Devereux
  • Charles Engel

Abstract

It is often suggested that currency unions unduly inhibit the efficient adjustment of real exchange rates. Recently, this has been seen as a key failure of the Eurozone. This paper presents evidence that throws doubt on this conclusion. Our evidence suggests that real exchange rate movement within the Eurozone was at least as compatible with efficient adjustment as the behavior of real exchange rates for the floating rate countries outside the Eurozone. This interpretation is consistent with a model in which nominal exchange rate movements give rise to persistent deviations from the law of one price in traded goods.

Suggested Citation

  • Martin Berka & Michael B. Devereux & Charles Engel, 2012. "Real Exchange Rate Adjustment in and out of the Eurozone," American Economic Review, American Economic Association, vol. 102(3), pages 179-185, May.
  • Handle: RePEc:aea:aecrev:v:102:y:2012:i:3:p:179-85
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    File URL: http://www.aeaweb.org/articles.php?doi=10.1257/aer.102.3.179
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    References listed on IDEAS

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    1. Charles Engel, 1999. "Accounting for U.S. Real Exchange Rate Changes," Journal of Political Economy, University of Chicago Press, vol. 107(3), pages 507-538, June.
    2. Michael B. Devereux & Charles Engel, 2003. "Monetary Policy in the Open Economy Revisited: Price Setting and Exchange-Rate Flexibility," Review of Economic Studies, Oxford University Press, vol. 70(4), pages 765-783.
    3. Martin Berka & Michael B. Devereux, 2010. "What determines European real exchange rates?," Globalization and Monetary Policy Institute Working Paper 46, Federal Reserve Bank of Dallas.
    4. Charles Engel, 2011. "Currency Misalignments and Optimal Monetary Policy: A Reexamination," American Economic Review, American Economic Association, vol. 101(6), pages 2796-2822, October.
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