Can sticky price models generate volatile and persistent real exchange rates?

Research output: Contribution to journalArticle

393 Citations (Scopus)

Abstract

The central puzzle in international business cycles is that fluctuations in real exchange rates are volatile and persistent. We quantify the popular story for real exchange rate fluctuations: they are generated by monetary shocks interacting with sticky goods prices. If prices are held fixed for at least one year, risk aversion is high, and preferences are separable in leisure, then real exchange rates generated by the model are as volatile as in the data and quite persistent, but less so than in the data. The main discrepancy between the model and the data, the consumption-real exchange rate anomaly, is that the model generates a high correlation between real exchange rates and the ratio of consumption across countries, while the data show no clear pattern between these variables.

Original languageEnglish (US)
Pages (from-to)533-563
Number of pages31
JournalReview of Economic Studies
Volume69
Issue number3
DOIs
StatePublished - Jul 2002

Fingerprint

Real exchange rate
Sticky prices
Anomaly
Risk aversion
International business cycles
Monetary shocks
Exchange rate fluctuations
Leisure
Fluctuations
Discrepancy

Cite this

@article{904fdd92f75b4070bd66b4b7fa18770d,
title = "Can sticky price models generate volatile and persistent real exchange rates?",
abstract = "The central puzzle in international business cycles is that fluctuations in real exchange rates are volatile and persistent. We quantify the popular story for real exchange rate fluctuations: they are generated by monetary shocks interacting with sticky goods prices. If prices are held fixed for at least one year, risk aversion is high, and preferences are separable in leisure, then real exchange rates generated by the model are as volatile as in the data and quite persistent, but less so than in the data. The main discrepancy between the model and the data, the consumption-real exchange rate anomaly, is that the model generates a high correlation between real exchange rates and the ratio of consumption across countries, while the data show no clear pattern between these variables.",
author = "Chari, {Varadarajan V} and Kehoe, {Patrick J} and McGrattan, {Ellen R}",
year = "2002",
month = "7",
doi = "10.1111/1467-937X.00216",
language = "English (US)",
volume = "69",
pages = "533--563",
journal = "Review of Economic Studies",
issn = "0034-6527",
publisher = "Oxford University Press",
number = "3",

}

TY - JOUR

T1 - Can sticky price models generate volatile and persistent real exchange rates?

AU - Chari, Varadarajan V

AU - Kehoe, Patrick J

AU - McGrattan, Ellen R

PY - 2002/7

Y1 - 2002/7

N2 - The central puzzle in international business cycles is that fluctuations in real exchange rates are volatile and persistent. We quantify the popular story for real exchange rate fluctuations: they are generated by monetary shocks interacting with sticky goods prices. If prices are held fixed for at least one year, risk aversion is high, and preferences are separable in leisure, then real exchange rates generated by the model are as volatile as in the data and quite persistent, but less so than in the data. The main discrepancy between the model and the data, the consumption-real exchange rate anomaly, is that the model generates a high correlation between real exchange rates and the ratio of consumption across countries, while the data show no clear pattern between these variables.

AB - The central puzzle in international business cycles is that fluctuations in real exchange rates are volatile and persistent. We quantify the popular story for real exchange rate fluctuations: they are generated by monetary shocks interacting with sticky goods prices. If prices are held fixed for at least one year, risk aversion is high, and preferences are separable in leisure, then real exchange rates generated by the model are as volatile as in the data and quite persistent, but less so than in the data. The main discrepancy between the model and the data, the consumption-real exchange rate anomaly, is that the model generates a high correlation between real exchange rates and the ratio of consumption across countries, while the data show no clear pattern between these variables.

UR - http://www.scopus.com/inward/record.url?scp=0036655918&partnerID=8YFLogxK

UR - http://www.scopus.com/inward/citedby.url?scp=0036655918&partnerID=8YFLogxK

U2 - 10.1111/1467-937X.00216

DO - 10.1111/1467-937X.00216

M3 - Article

AN - SCOPUS:0036655918

VL - 69

SP - 533

EP - 563

JO - Review of Economic Studies

JF - Review of Economic Studies

SN - 0034-6527

IS - 3

ER -