Explaining the exchange rate in the euro zone through non-tradable goods and the income effect
International Journal of Development Research
Explaining the exchange rate in the euro zone through non-tradable goods and the income effect
Received 17th November, 2018; Received in revised form 26th December, 2018; Accepted 08th January, 2019; Published online 27th February, 2019
Copyright © 2018, Leonardo Augusto Tariffi. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.
This paper shows those fundamental macroeconomics variables which explain the behaviour of the real exchange rate (RER) in the Euro Zone, with special emphasis in tariff rates. Diminishing tariffs on imports affect tradable and non-tradable sectors depending on substitution or income effects. When the substitution effect prevails, lower tariffs increase imports and the demand for foreign currency depreciates the euro. When the income effect is stronger, lower tariffs increase demand for goods in both tradable and non-tradable sectors. It boosts productivity and increases relative prices in the non-tradable sector.
