Journal Article

Can Sticky Price Models Generate Volatile and Persistent Real Exchange Rates?

V. V Chari, Patrick J. Kehoe and Ellen R. McGrattan

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 69, issue 3, pages 533-563
Published in print July 2002 | ISSN: 0034-6527
Published online July 2002 | e-ISSN: 1467-937X | DOI: http://dx.doi.org/10.1111/1467-937X.00216
Can Sticky Price Models Generate Volatile and Persistent Real Exchange Rates?

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  • Prices, Business Fluctuations, and Cycles
  • Macroeconomic Aspects of International Trade and Finance
  • International Finance

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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.

Keywords: E32; F31; F41

Journal Article.  0 words. 

Subjects: Prices, Business Fluctuations, and Cycles ; Macroeconomic Aspects of International Trade and Finance ; International Finance

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