The Natural Real Exchange Rate Between the French Franc and the Deutschmark: Implications for Monetary Union

Liliane L. Crouhy‐Veyrac and Michèle Saint Marc

in Fundamental Determinants of Exchange Rates

Published in print April 1998 | ISBN: 9780198293064
Published online November 2003 | e-ISBN: 9780191596940 | DOI:
 The Natural Real Exchange Rate Between the French Franc and the Deutschmark: Implications for Monetary Union

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The bilateral French/German real exchange rate does respond to the real fundamentals of relative thrift and productivity as predicted by the NATREX model. Increases in relative thrift, measured by relative social saving/national product, and increases in relative productivity, measured by the relative capital/employment ratios, both produce long‐run real appreciation of the French franc relative to the Deutsche mark. The sample period, 1971–90, includes a variety of nominal exchange‐rate policies. The responsiveness of the real exchange rate to the fundamentals supports the NATREX assumption that real exchange rates will adjust, regardless of the nominal exchange rate regime. If differing national monetary policies, either actual or expected, prevent the adjustment of relative goods prices, then the pressures to change nominal exchange rates become irresistible, as seen in the disruption of the EMS exchange rates in 1992. Moreover, even with similar monetary policies, wage and price rigidity may slow the adjustment of the actual real exchange rate to the NATREX, increasing the economic costs of a fixed nominal exchange rate.

Keywords: EMS exchange rates; French/German nominal exchange‐rate policies; French/German real exchange rate; French/German real fundamentals productivity and thrift

Chapter.  8252 words.  Illustrated.

Subjects: Macroeconomics and Monetary Economics

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