Slow Adjustment of the Real Exchange Rate in a Monetary Union
In a monetary union, the real exchange rate acts as a slow automatic stabilizer for country-specific shocks. Following a positive demand shock, for instance, the resulting domestic inflation cannot be countered by a rise in the policy interest rate. Instead, over successive rounds of wage and price setting, the sustained higher inflation causes the country's real exchange rate to appreciate. This appreciation worsens its net exports, which progressively dampens aggregate demand and eventually offsets the initial shock.
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Slow Adjustment of the Real Exchange Rate in a Monetary Union
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Slow Adjustment of the Real Exchange Rate in a Monetary Union
Slow Adjustment of the Real Exchange Rate in a Monetary Union
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Inflation Dynamics in a Monetary Union Member
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Learn After
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