The Dynamic Behavior of the Real Exchange Rate in Sticky Price Models
American Economic Review · 2008 · Volume 98 · Issue 1
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 sticky price business cycle models have been unable to match the 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. (JEL F31)
Keywords
Price Level, Inflation, Deflation, Business Fluctuations, Cycles, Foreign Exchange
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