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Real rigidities and real exchange rate volatility

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  • Craighead, William D.

Abstract

This paper shows that certain real rigidities can help explain high volatility of real exchange rates relative to other macroeconomic aggregates. An international real business cycle model is used to demonstrate that real exchange rate volatility increases if (i) it is costly to move labor between sectors and (ii) the consumption of tradable goods requires distribution services. Model dynamics are generated by shocks to productivity and preferences based on sectoral output, employment and consumption data from G-7 countries. The introduction of intersectoral adjustment and distribution costs substantially increases the real exchange rate volatility generated by the model.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 28 (2009)
Issue (Month): 1 (February)
Pages: 135-147

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Handle: RePEc:eee:jimfin:v:28:y:2009:i:1:p:135-147

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Web page: http://www.elsevier.com/locate/inca/30443

Related research

Keywords: Real exchange rates Intersectoral adjustment costs Distribution costs;

References

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  15. Mahbub Morshed, A. K. M. & Turnovsky, Stephen J., 2004. "Sectoral adjustment costs and real exchange rate dynamics in a two-sector dependent economy," Journal of International Economics, Elsevier, vol. 63(1), pages 147-177, May.
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Citations

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Cited by:
  1. Mahbub Morshed, A.K.M. & Turnovsky, Stephen J., 2011. "Real exchange rate dynamics: The role of elastic labor supply," Journal of International Money and Finance, Elsevier, vol. 30(7), pages 1303-1322.
  2. Max Groneck & Christoph Kaufmann, 2014. "Relative Sectoral Prices and Population Ageing: A Common Trend," Working Paper Series in Economics 69, University of Cologne, Department of Economics.
  3. Craighead, William D., 2014. "Monetary rules and sectoral unemployment in open economies," Journal of Macroeconomics, Elsevier, vol. 40(C), pages 277-292.

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