Endogenous norms in wage and price setting and hysteresis in the real exchange rate
Real exchange rates are often ‘disconnected’ from fundamentals. Mean reversion toward equilibrium operates at a slow pace (if it operates at all), and when inflation is low the real exchange rate tracks closely the nominal exchange rate for prolonged periods of time. Using a simple open economy mode...
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| Formato: | Artículo |
| Lenguaje: | en_US |
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2019
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| Acceso en línea: | http://repositorio.cedes.org/handle/123456789/4493 https://doi.org/10.1111/meca.12200 |
| Aporte de: |
| Sumario: | Real exchange rates are often ‘disconnected’ from fundamentals. Mean reversion toward equilibrium operates at a slow pace (if it operates at all), and when inflation is low the real exchange rate tracks closely the nominal exchange rate for prolonged periods of time. Using a simple open economy model, we show that including endogenous norms in wage and price setting in an open economy set‐up can lead to hysteresis in the real exchange rate. For a given set of fundamentals, the real exchange rate may settle down at different equilibria and exchange rate policies are not necessarily neutral in the long‐run. |
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