Year: 2008
Type: report
Abstract: Existing empirical evidence suggests that real exchange rates exhibit hump-shaped dynamics.I show that this is a robust fact across nine large, developed economies.This fact can help explain why existing sticky-price business cycle models have been unable to match the persistence of the real exchange rate.The recent literature has focused on models driven by monetary shocks.These models yield monotonic impulse responses for the real exchange rate.It is extremely difficult for models that have this feature to match the empirical persistence of the real exchange rate.I show that in response to a number of different real shocks a two-country sticky-price business cycle model yields hump-shaped dynamics for the real exchange rate.The hump-shaped dynamics generated by the model are a powerful source of endogenous persistence that allows the model to match the long half-life of the real exchange rate.
DOI: 10.3386/w13910
Author: Jón Steinsson
Institutions: National Bureau of Economic Research, Columbia University
Language: English
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W3124628128