Real exchange rate dynamics: The role of elastic labor supply

AKM Mahbub Morshed and Stephen J Turnovsky ()

Journal of International Money and Finance, 2011, vol. 30, issue 7, pages 1303-1322

Abstract: Empirical evidence suggests that the flexibility of labor supply is closely related to the dynamic adjustment of the real exchange rate. This paper investigates this relationship in a two-sector dependent economy model. While, the long-run equilibrium real exchange rate is independent of the elasticity of labor supply, our analysis confirms that the nature of the labor supply can be a crucially important determinant of its short-run dynamics. The extent to which this is so depends to some degree on the source of the underlying structural change that is driving the dynamics of the real exchange rate. Numerical simulations confirm that this mechanism may help explain the larger short-run volatility and more rapid convergence typically associated with developing countries having less flexible labor markets.

Keywords: Elastic labor supply; Real exchange rate; Persistence; Volatility (search for similar items in EconPapers)
JEL-codes: F31 F41 (search for similar items in EconPapers)
Date: 2011
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Persistent link: http://EconPapers.repec.org/RePEc:eee:jimfin:v:30:y:2011:i:7:p:1303-1322

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