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

  • Gabriella Legrenzi

    (Cambridge University)

  • Costas Milas

    (City University)

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.

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Paper provided by EconWPA in its series International Finance with number 0411007.

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Length: 24 pages
Date of creation: 17 Nov 2004
Date of revision:
Handle: RePEc:wpa:wuwpif:0411007
Note: Type of Document - pdf; pages: 24
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