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Real Exchange Rate Behavior Under Floating and Fixed Regimes

James Lothian and Cornelia McCarthy ()

International Finance from University Library of Munich, Germany

Abstract: In this paper we examine the stability of the real exchange rate and the macroeconomic effects of alternative exchange-rate regimes, including currency union, on real exchange-rate behaviour. We focus on the Irish punt in order to exploit its diversity of experience over different nominal exchange rate regimes. We make both temporal and cross-country comparisons of real-exchange-rate stability for the Irish punt with sterling, the US dollar and the German mark. We reach two conclusions on the basis of our results. The first is that for Ireland, as for most other countries, purchasing power parity provides a reasonably good description of actual exchange rate behaviour over the long run. Our second principal conclusion concerns regime effects. Currency union appears to matter. The real exchange rates we analyse are unambiguously less variable under currency union than under alternative exchange-rate systems. Otherwise, however, we find no clear-cut differences in behaviour across regimes.

Keywords: Exchange Rates; purchasing power parity; exchange-rate regimes; currency union (search for similar items in EconPapers)
JEL-codes: F31 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba and nep-ifn
Date: 2003-11-12
Note: Type of Document - ; pages: 27
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