← Search

American Economic Review Vol. 102 No. 3 2012

Real Exchange Rate Adjustment in and out of the Eurozone

Martin Berka1; Michael B. Devereux2; Charles Engel3

1 School of Economics and Finance, Victoria University of Wellington, P.O. Box 600, Wellington, New Zealand. · 2 Department of Economics, University of British Columbia, 997-1873 East Mall, Vancouver, BC V6T 1Z1, Canada. · 3 Department of Economics, 1180 Observatory Drive, University of Wisconsin, Madison, WI 53706-1393.

Abstract

It is often suggested that currency unions unduly inhibit the efficient adjustment of real exchange rates. Recently, this has been seen as a key failure of the Eurozone. This paper presents evidence that throws doubt on this conclusion. Our evidence suggests that real exchange rate movement within the Eurozone was at least as compatible with efficient adjustment as the behavior of real exchange rates for the floating rate countries outside the Eurozone. This interpretation is consistent with a model in which nominal exchange rate movements give rise to persistent deviations from the law of one price in traded goods.

DOI
10.1257/aer.102.3.179
Volume
102
Issue
3
Pages
179-185
Language
en
Sources
bibtex:phds-export.bib openalex crossref

Cite