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In this context, because the real exchange rate can play such a role, it is included in both the first and the fifth equations. Under the common currency regime, nominal exchange rate movements have been substituted with real exchange rate movements. However, there are three features of exchange rates that are far less easily explained using conventional modelling techniques: Exchange rates are very volatile; there is a very high correlation between the nominal and the real exchange rate in the short run; and macroeconomic fundamentals do not do a very good job at explaining high frequency (i. |
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