Discussion paper

DP3376 The Real Exchange Rate Always Floats

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.

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Citation

Gylfason, T (2002), “DP3376 The Real Exchange Rate Always Floats”, CEPR Press Discussion Paper No. 3376. https://cepr.org/publications/dp3376