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

Research output: Contribution to journalArticle

401 Scopus citations

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 Dive into the research topics of 'Can sticky price models generate volatile and persistent real exchange rates?'. Together they form a unique fingerprint.

  • Cite this