Real exchange rates under alternative nominal exchange-rate systems

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Abstract

The paper develops an equilibrium model of the determination of exchange rates, the relative price of nontraded goods, and the current account. The focus is on the effects of various real and nominal disturbances and the conditions under which the nominal exchange-rate system is neutral with respect to real variables in the economy. The model demonstrates an assymetry in the roles of trade and nontraded goods in affecting exchange rates. An econometric investigation of the raltion between the exchange-rate system and the variability of real exchange rates provides some evidence against the neutrality hypothesis.

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    An earlier version of this paper circulated under the title, ‘Monetary Control and Terilization under Pegged Exchange Rates’. I wish to tank Robert Barro, John Bilson, Michael Darby, Jacob Frenkel, Jeremy Greenwood, Leonardo Leiderman, James Lothian. Robert Lucas, Rick Mishkin, Nasser Saidi, and Anna Schwartz for comments on earlier drafts.

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