Micro information and micro exchange can push forward real change.

There is huge room to maneuver between the extremes of targeting a specific level of the real exchange rate and disowning any interest in the real exchange rate.

Real exchange rate adjustments inside a monetary union, or among countries with fixed exchange rates, can take place through inflation differentials.

Inflation did, indeed, come down but the real exchange rate rapidly became overvalued.

Over time, real exchange rate appreciation will cause a shift in expenditure, making China s rebalancing more apparent.

Virtually every instance of sustained high growth has been accompanied by a significantly depreciated real exchange rate.

A rising nominal and real exchange rate can propel structural change a weak currency policy is a trap.

Countries that grow faster tend to experience real exchange rate appreciation, a phenomenon known as the Balassa Samuelson effect.

The three phenomena that boost nominal GDP increases in real output, a rise in the relative price of exports, and real exchange rate appreciation do not operate independently of one another.

The real exchange rate is of paramount importance here, as it determines the competitiveness and profitability of modern tradable activities.

The same can be said of capital inflows and the upward pressure that they place on the real exchange rate.

Any change in the exchange rate of the dollar affects the purchasing power of these countries, and therefore their real income.

The lack of adjustment of surplus countries with inflexible exchange rate regimes means that as the US deficit falls, a counterbalancing deficit develops elsewhere in the world along with real effective exchange rate appreciation.

One such implication is that developing countries will have to substitute real industrial policies for those that operate through the exchange rate.

Anchoring the exchange rate is likely to result in disproportionate real appreciation, loss of competitiveness, external and financial crises, and disastrous recessions.

Moreover, today s global imbalances and misaligned real exchange rates threaten to bring on not just mild recession, but significant and prolonged depression.

But expanding demand and allowing real effective exchange rate appreciation in China will not be enough if other countries do not do their part.

After a decade that saw wages grow faster than productivity, unit labor costs (and the real exchange rate based on those costs) appreciated sharply.

For countries seeking re entry into international financial markets after the debt crisis, higher real interest rates and a stable exchange rate were prerequisites.

However, in later periods the objective was to avoid real exchange rate appreciation, and, at the same time, to accumulate international reserves and strengthen credibility.

Real exchange rates may also appreciate because of increases in capital inflows, which reflect foreign investors enthusiasm for the prospects of the country in question.

If that causes a rise in the departing country s price level, the nominal exchange rate would have to decline further to achieve the same real adjustment.

On one hand, they want to achieve a comprehensive political solution with the Palestinians based on creating a Palestinian state, in exchange for real, lasting peace.

That, in turn, implies the need for a real exchange rate adjustment inside the eurozone, with peripheral countries production costs falling relative to those in the core.

This is forcing deficit countries into real exchange rate adjustments via deflation and thus a rising burden of public and private debt that may lead to disorderly defaults.

And so it has remained budgets are cut, growth falters, and periphery countries must engineer substantial real exchange rate devaluations to regain competitiveness and close their external deficits.

In recent years, slowing the pace of real exchange rate appreciation to shelter domestic producers and employment from import competition seems to have gained clear precedence over disinflation.

First, China has an understandable interest in diversifying its substantial holdings of foreign exchange reserves away from low yielding US Treasuries to real productive assets with higher returns.

Then a decade of nominal wage growth that out paced productivity gains led to a rise in unit labor costs, real exchange rate appreciation, and large current account deficits.

A secondary intention is to show the world that Israel is ready to withdraw from most of the remaining territories it captured in 1967 in exchange for real peace.

In some of them, the erosion of competitiveness associated with real exchange rate appreciation (the Dutch disease ) is becoming a burden to producers and is choking off economic growth.

The three percentage point difference implies that the real inflation adjusted renminbi dollar exchange rate rose 9 over the past year (i.e., 6 nominal appreciation plus the 3 inflation difference.)

The strategy ran aground in 2000, when Prime Minister Ehud Barak offered to give up almost all the occupied territories and accept a Palestinian state in exchange for real peace.

Indeed, a third lesson is that neither hard pegs nor unfettered floating facilitate the preservation of a competitive real exchange rate, which is crucial to promoting and sustaining economic development.

This means that the fiscal authorities have a big responsibility to target a structural fiscal surplus that is high enough to generate the space needed for real exchange rate depreciation.

Equally important, the central bank needs to signal to the public that it now cares about the real exchange rate, because it is important to exports, jobs, and sustainable growth.

Understandably, the initial efforts of the van Rompuy Task Force were directed at more effective crisis prevention intensified budgetary surveillance and monitoring of movements in real exchange rates and external imbalances.

Back then, pegging the renminbi to the dollar pushed down China s real effective exchange rate, because the dollar was losing value against other currencies, such as the euro, sterling, and yen.

Indeed, the impact of real exchange rate depreciation on growth is likely to be short lived unless increased corporate profits in the export sector lead to higher household consumption and investment.

Once the monetary rules of the game incorporate the real exchange rate, and assuming that fiscal policy remains supportive, investors can look forward to a less volatile and more competitive currency.

But, because Germany and the other northern surplus countries remain hawkish on price stability, real exchange rate adjustment within the eurozone requires actual wage and price deflation in the distressed southern economies.

After the restructurings, almost all debtor countries experienced an economic recovery and regained external viability (also due to real exchange rate depreciation), although in a context of more favourable global economic conditions.

Yet the pattern of exchange rate movements in the rest of the world has been largely unrelated to existing current account positions. In fact, currencies of surplus countries with heavily managed exchange rates have actually depreciated in real effective terms since the summer, creating inflationary pressure and frustrating global adjustment.

Only if the post Arafat movement decides that it really wants a Palestinian state in exchange for ending the conflict with Israel in every respect will there be a real chance of peace.

The underlying problem remains that, while both central banks and finance ministries are unhappy about the excessive volatility of real and nominal exchange rates, they do not understand very well what causes it.