Endogenous norms in wage and price setting and hysteresis in the real exchange rate

摘要

Real exchange rates are often disconnected' from fundamentals. Mean reversion toward equilibrium operates at a slow pace (if it operates at all), and when inflation is low the real exchange rate tracks closely the nominal exchange rate for prolonged periods of time. Using a simple open economy model, we show that including endogenous norms in wage and price setting in an open economy set-up can lead to hysteresis in the real exchange rate. For a given set of fundamentals, the real exchange rate may settle down at different equilibria and exchange rate policies are not necessarily neutral in the long-run.