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Exchange Rate Disconnect in a Standard Open-Economy Macro Model

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  • Bernd Kempa

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

Suggested Citation

  • Bernd Kempa, 2005. "Exchange Rate Disconnect in a Standard Open-Economy Macro Model," Open Economies Review, Springer, vol. 16(3), pages 283-293, July.
    • Handle: RePEc:kap:openec:v:16:y:2005:i:3:p:283-293
    DOI: 10.1007/s11079-005-1026-y
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