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

  • Gabriella Legrenzi

    ()

    (Keele University, Department of Economics)

  • Costas Milas

    ()

    (Keele University, Department of Economics)

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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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
Date of revision:
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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Department of Economics, University of Keele, Keele, Staffordshire, ST5 5BG - United Kingdom

Phone: +44 (0)1782 584581
Fax: +44 (0)1782 717577
Web page: http://www.keele.ac.uk/depts/ec/cer/
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Order Information: Postal: Centre for Economic Research, Research Institute for Public Policy and Management, Keele University, Staffordshire ST5 5BG - United Kingdom
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