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

Author

Listed:
  • Gabriella Legrenzi

    (Cambridge University)

  • Costas Milas

    (City University)

Abstract

Using data over the 1973q1-2004q1 period, this paper identifies an important role for the real exchange rate in affecting UK labour market conditions. 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. The unemployment response to the real exchange rate deviations occurs 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. Our results also suggest that when the real exchange rate is undervalued, workers respond to an improvement in domestic competitiveness by demanding and getting higher wages. Again, this effect is non-linear.

Suggested Citation

  • Gabriella Legrenzi & Costas Milas, 2004. "Non-linear real exchange rate effects in the UK labour market," International Finance 0411007, EconWPA.
  • Handle: RePEc:wpa:wuwpif:0411007
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    References listed on IDEAS

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    Cited by:

    1. Ubilava, David & holt, Matt, 2013. "El Ni~no southern oscillation and its effects on world vegetable oil prices: assessing asymmetries using smooth transition models," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 57(2), June.
    2. Shu-Chen Chang, 2010. "Effects of Asymmetric Adjustment Among Labor Productivity, Labor Demand, and Exchange Rate Using Threshold Cointegration Test," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 46(6), pages 55-68, November.
    3. Buncic, Daniel, 2017. "Identification and Estimation issues in Exponential Smooth Transition Autoregressive Models," Working Paper Series 344, Sveriges Riksbank (Central Bank of Sweden).
    4. Serra, Teresa & Zilberman, David & Gil, Jose Maria & Goodwin, Barry K., 2008. "Nonlinearities in the US corn-ethanol-oil price system," 2008 Annual Meeting, July 27-29, 2008, Orlando, Florida 6512, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    5. Shu-Chen Chang, 2010. "Effects of Asymmetric Adjustment Among Labor Productivity, Labor Demand, and Exchange Rate Using Threshold Cointegration Test," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 46(6), pages 55-68, November.

    More about this item

    Keywords

    Real exchange rate; unemployment; monetary policy; Smooth Transition Vector Error Correction Model.;

    JEL classification:

    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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