Exchange Rate Disconnect in a Standard Open-Economy Macro Model

Bernd Kempa

Open Economies Review, 2005, vol. 16, issue 3, 283-293

Abstract: This paper demonstrates that the well-documented exchange rate disconnect can be explained within traditional exchange rate models. It is shown that even if the underlying fundamentals are invariant across exchange rate regimes, equilibrium real exchange rates are more volatile under flexible nominal exchange rates than under fixed rates. In particular, fixed rates reduce the requisite adjustments of the real exchange rate in response to both nominal and real shocks relative to a floating-rate scenario. Copyright Springer Science + Business Media, Inc. 2005

Keywords: exchange rate volatility; exchange rate regime; nominal and real shocks (search for similar items in EconPapers)
Date: 2005
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DOI: 10.1007/s11079-005-1026-y

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