Edited by Klaus Liebscher, Josef Christl, Peter Mooslechner and Doris Ritzberger-Grünwald
Chapter 1: Competitiveness Still has Currency
Klaus Liebscher1 Currency and competitiveness topics are staple issues in central banking. Currencies are even at the core of central banks’ business – given that, as a form of money, currencies facilitate the transfer of goods and services by serving as a means of exchange, enable the storage of wealth and serve as a unit of accounting. In order to help money accomplish its tasks across national boundaries we need exchange rates – the prices at which currencies can be traded against each other. With respect to exchange rates, three main questions have been debated by academics and central bankers for years: how are they determined? What is their economic impact? How should monetary policy act? With regard to the drivers of exchange rate changes, we need to understand that the factors inﬂuencing both supply and demand forces can be either structural or monetary policy-related: 1. As for long-term structural factors, one usual suspect is the purchasing power parity theory. It states that identical baskets of goods should ultimately cost the same in one currency as in another currency times the exchange rate between these currencies. Another possible long-run factor of real exchange rate movements – that take into account inﬂation – is the development of overall or relative productivity levels. A more medium-term structural factor is the balance-of-payment model, which holds that a foreign exchange rate in an equilibrium level requires a stable current account balance. From a monetary policy perspective, another, rather short-term explanation is suggested by the so-called uncovered...
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