DP3376 The Real Exchange Rate Always Floats
Author(s): | Thorvaldur Gylfason |
Publication Date: | May 2002 |
Keyword(s): | flexible exchange rates |
JEL(s): | F31 |
Programme Areas: | International Macroeconomics |
Link to this Page: | cepr.org/active/publications/discussion_papers/dp.php?dpno=3376 |
This Paper makes two main points. First, irrespective of nominal exchange rate arrangements, the real exchange rate always floats ? if not through nominal exchange rate adjustment, then through price change. Further, because prices and wages tend to be sticky, the adjustment of real exchange rates towards long-run equilibrium takes time, as witnessed by long-lasting currency misalignments around the world. Second, real exchange rates are likely to fluctuate on their way towards long-run equilibrium because of the dynamic interaction between real exchange rates and the current account; or, put differently, because the structure of lags with which exchange rates impact the volume of exports and imports may give rise to oscillatory behaviour.