The Real Exchange Rate under Alternative Nominal Exchange Rate Regimes

The Real Exchange Rate under Alternative Nominal Exchange Rate Regimes

The real exchange rate is defined as the relative price of tradable goods to nontradable goods. Its equilibrium value is modified by real disturbances emerging in the goods market on the supply or demand side. The real shock analyzed in the paper is an expenditure-switching fiscal policy. The subsequent change in the real exchange rate takes place independently on the underlying nominal exchange rate regime. The difference between fixed and flexible nominal exchange rates concerns only the proper mix of flexibility of the absolute price levels of tradables and nontradables.