Real Exchange Rates and Macroeconomics: Evidence and Theory
Since the early 1980s, a large body of research has thrown doubt on the relevance of macroeconomic models for understanding exchange rates. The authors argue that a balanced reading of recent literature in exchange rate economics gives a more optimistic assessment. Many studies have established the pertinence of long-run purchasing power parity (PPP) and the explanatory power of macroeconomic fundamentals in real exchange rate fluctuations. A reasonably strong case can be made for a traditional macroeocnomic interpretation of real exchange rates, which emphasizes short-run price stickiness, but long-run PPP. But a central new ingredient in this interpretation is the presence of international commodity market segmentation and persistent deviations from the 'law of one price.' An example is given of a dynamic general equilibrium model that can reproduce some of the observed features of real exchange rate fluctuations.
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Volume (Year): 30 (1997)
Issue (Month): 4 (November)
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