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Abstract

The flexible-price two-country monetary model is extended to include a consumption externality with habit persistence. Two methodologies are employed to explore this model's ability to generate volatile and persistent exchange rates. In the first, actual data is used for the exogenous driving processes. In the second, the model is simulated using estimated forcing processes. The theory, in both cases, is capable of explaining the high volatility and persistence of real and nominal exchange rates as well as the high correlation between real and nominal rates.

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File URL: http://www.sciencedirect.com/science/article/B6VBW-4N2KTMR-1/1/9eb35a6096fd4202505fb6651568e8ae
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Bibliographic Info

Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 55 (2008)
Issue (Month): 2 (March)
Pages: 423-433

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Handle: RePEc:eee:moneco:v:55:y:2008:i:2:p:423-433

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Web page: http://www.elsevier.com/locate/inca/505566

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References

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12. Maurice J. Roche & Michael J. Moore, 1999. "Less of a puzzle: a new look at the forward forex market," Economics, Finance and Accounting Department Working Paper Series n910799, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth.
    
    • Moore, Michael J. & Roche, Maurice J., 2002. "Less of a puzzle: a new look at the forward forex market," Journal of International Economics, Elsevier, vol. 58(2), pages 387-411, December.
13. Harald Uhlig & Lars Ljungqvist, 2000. "Tax Policy and Aggregate Demand Management under Catching Up with the Joneses," American Economic Review, American Economic Association, vol. 90(3), pages 356-366, June.
14. Stockman, Alan C., 1979. "On explaining the behavior of exchange rates : A comment on papers by Mussa and Bilson," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 11(1), pages 123-130, January.

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Cited by:

1. Nikolaou, Kleopatra, 2008. "The behaviour of the real exchange rate: Evidence from regression quantiles," Journal of Banking & Finance, Elsevier, vol. 32(5), pages 664-679, May.
2. Moore, Michael J. & Roche, Maurice J., 2010. "Solving exchange rate puzzles with neither sticky prices nor trade costs," Journal of International Money and Finance, Elsevier, vol. 29(6), pages 1151-1170, October.
   
   • Maurice J. Roche & Michael J. Moore, 2007. "Solving Exchange Rate Puzzles with neither Sticky Prices nor Trade Costs," Economics, Finance and Accounting Department Working Paper Series n1750507, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth.
   • Maurice J. Roche & Michael J. Moore, 2009. "Solving Exchange Rate Puzzles with neither Sticky Prices nor Trade Costs," Working Papers 001, Ryerson University, Department of Economics.
3. Menzie D. Chinn & Michael J. Moore, 2008. "Private Information and a Macro Model of Exchange Rates: Evidence from a Novel Data Set," NBER Working Papers 14175, National Bureau of Economic Research, Inc.

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