DP3376 The Real Exchange Rate Always Floats
|Publication Date:||May 2002|
|Keyword(s):||flexible exchange rates|
|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.