Working Paper: CEPR ID: DP3376
Authors: Thorvaldur Gylfason
Abstract: 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.
Keywords: Flexible exchange rates
JEL Codes: F31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| nominal exchange rates (F31) | real exchange rates (F31) |
| real exchange rates (F31) | current account (F32) |
| current account (F32) | real exchange rates (F31) |