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

  • Gabriella Legrenzi

    (Keele University)

  • Costas Milas

    (Keele University)

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 EconWPA in its series Macroeconomics with number 0507019.

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Length: 32 pages
Date of creation: 18 Jul 2005
Date of revision:
Handle: RePEc:wpa:wuwpma:0507019
Note: Type of Document - pdf; pages: 32
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