Date of Original Version
Abstract or Description
Usually economists and policymakers complain that prices and particularly wages do not respond quickly enough or do not change enough to clear markets. When the discussion turns to exchange rates, this complaint is reversed. Policymakers, and some economists, complain that exchange rates are "too volatile" — change too much, too often and too quickly. Of course, inflexible vages and highly flexible exchange rates are not unrelated in a general equilibrium model. If wages are more flexible exchange rates are less volatile. Relatively constant policies that require fewer adjustments of beliefs, also require fewer adjustments of prices and, therefore, reduce the volatility of exchange rates.