Monetary Shocks and Real Exchange Rate Hysteresis: Evidence from the G‐7 Countries

David Rapach

Review of International Economics, 2001, vol. 9, issue 2, 356-371

Abstract: Long‐run monetary neutrality specifies that nominal disturbances do not affect long‐run real exchange rates. However, the “over depreciation” of the US dollar in the late 1980s, after its strong appreciation earlier in the decade, suggested to a number of observers that nominal disturbances alter long‐run real exchange rates; that is, money supply shocks entail real exchange rate hysteresis. Using data from the G‐7 countries and the post‐1973 float, the paper measures the long‐run effects of relative money supply disturbances on real US dollar exchange rates. Little evidence of hysteretic monetary policy effects is found.

Date: 2001
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