Non-linear real exchange rate effects in the UK labour market

Gabriella Legrenzi () and Costas Milas

International Finance from EconWPA

Abstract: Using data over the 1973q1-2004q1 period, this paper identifies an important role for the real exchange rate in affecting UK labour market conditions. When the real exchange rate is undervalued, short-run unemployment falls as firms respond to an improvement in domestic competitiveness by increasing their demand for labour. The unemployment response to the real exchange rate deviations occurs outside a narrow interval band. To the extent that the real exchange rate equation reflects monetary policy considerations, our results imply that unemployment can be targeted by economic policy. Our results also suggest that when the real exchange rate is undervalued, workers respond to an improvement in domestic competitiveness by demanding and getting higher wages. Again, this effect is non-linear.

Keywords: Real exchange rate; unemployment; monetary policy; Smooth Transition Vector Error Correction Model. (search for similar items in EconPapers)
JEL-codes: F3 F4 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ifn
Date: 2004-11-17
Note: Type of Document - pdf; pages: 24
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http://129.3.20.41/eps/if/papers/0411/0411007.pdf (application/pdf)

Related works:
Working Paper: Non-linear real exchange rate effects in the UK labour market (2005)
Working Paper: Non-linear real exchange rate effects in the UK labour market (2005)
Journal Article: Non-linear Real Exchange Rate Effects in the UK Labour Market (2006)
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Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpif:0411007

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