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Why Is the Business-Cycle Behaviour of Fundamentals Alike across Exchange-Rate Regimes?

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Dedola, Luca
Leduc, Sylvain

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Abstract

Since the adoption of flexible exchange rates, real exchange rates have been much more volatile than they were under Bretton Woods. However, the volatilities of most other macroeconomic variables have remained approximately unchanged. This poses a puzzle for standard international business cycle models. This paper develops a two-country, two-sector model with nominal rigidities featuring deviations from the law of one price due to firms setting prices in buyers currencies. By partially insulating good, markets across countries and thus mitigating the international expenditure-switching effect, this pricing behaviour is found to considerably dampen the responses of quantities to shocks hitting the economies therefore helping to account for the puzzle. Copyright @ 2001 by John Wiley & Sons, Ltd. All rights reserved.

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Article provided by John Wiley & Sons, Ltd. in its journal International Journal of Finance & Economics.

Volume (Year): 6 (2001)
Issue (Month): 4 (October)
Pages: 401-19
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Handle: RePEc:ijf:ijfiec:v:6:y:2001:i:4:p:401-19

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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Corsetti, Giancarlo & Dedola, Luca & Leduc, Sylvain, 2005. "DSGE Models of High Exchange-Rate Volatility and Low Pass-Through," CEPR Discussion Papers 5377, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  2. Riccardo Cristadoro & Andrea Gerali & Stefano Neri & Massimiliano Pisani, 2008. "Real exchange rate volatility and disconnect: an empirical investigation," Temi di discussione (Economic working papers) 660, Bank of Italy, Economic Research Department. [Downloadable!]
  3. Theptida Sopraseuth, 2003. "Exchange Rate Regimes and International Business Cycles," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(2), pages 338-361, April. [Downloadable!] (restricted)
    Other versions:
  4. Monica Paiella, 2001. "Limited Financial Market Participation: A Transaction Cost-Based Explanation," Temi di discussione (Economic working papers) 415, Bank of Italy, Economic Research Department. [Downloadable!]
    Other versions:
  5. Reinhart, Carmen, 2002. "A Modern History of Exchange Rate Arrangements: Chartbook, 1946-2001," MPRA Paper 13192, University Library of Munich, Germany. [Downloadable!]
  6. Reinhart, Carmen, 2002. "A Modern History of Exchange Rate Arrangements: The Country Histories, 1946-2001," MPRA Paper 13191, University Library of Munich, Germany. [Downloadable!]
  7. Riccardo Cristadoro & Andrea Gerali & Stefano Neri & Massimiliano Pisani, 2006. "Nominal Rigidities in an Estimated Two Country," Computing in Economics and Finance 2006 162, Society for Computational Economics. [Downloadable!]
  8. Reinhart, Carmen, 2002. "A Modern History of Exchange Rate Arrangements: Parallel Markets and Dual and Multiple Exchange Rates," MPRA Paper 13194, University Library of Munich, Germany. [Downloadable!]
  9. Carmen M. Reinhart & Kenneth S. Rogoff, 2002. "The Modern History of Exchange Rate Arrangements: A Reinterpretation," NBER Working Papers 8963, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  10. Kollmann, Robert, 2002. "Monetary Policy Rules in the Open Economy: Effects on Welfare and Business Cycles," CEPR Discussion Papers 3279, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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