An analysis of causes and welfare effects of real exchange rate movements.

This thesis contributes to the research on determinants and welfare effects of real exchange rate movements. Chapters two to four focus on a discussion of money supply shocks as one of the sources of changes in the real exchange rate. More specifically chapter two contains a critical overview of empirical and theoretical research that contributes to our understanding of the monetary transmission mechanism in open economies. The chapter analyses two specific classes of models, liquidity models and sticky price models and investigates to which degree these models are able to rationalise the result of related empirical studies. The third chapter focuses on the determinants of the welfare effects of money supply shocks across countries if prices are sticky. It analyses specifically the implications of different forms of price stickiness. Furthermore it combines these nominal rigidities with different real imperfections in the labour market. The chapter concludes that the impact of a money supply shock on real exchange rates and the welfare effect at home and abroad depend strongly on the type of nominal rigidity assumed. The fourth chapter analyses the effect of a money supply shock on tradable and nontradable producers inside a country and shows that the widespread belief that tradable sectors benefit the most from a depreciation of the exchange rate could be misplaced. It stresses the importance of sectoral labour mobility and risk sharing in an evaluation of relative welfare effects. The fifth chapter discusses the link between structural changes inside economies with the real exchange rate using transition economies as an example. In doing so the chapter abstracts completely from any nominal variables. Instead it argues that the real exchange rate movement in transition countries is at least partly driven by imperfections in the capital markets. The sixth fifth chapter concludes the thesis