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Intermediate Goods and Exchange Rate Disconnect

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  • William D. Craighead

    (Colorado College)

Abstract

This paper introduces intermediate goods trade into a two-country real business cycle model and examines its implications for real exchange rate behavior. Intermediate goods trade is shown to reduce “exchange rate disconnect” by increasing the volatility of the real exchange rate relative to output and weakening the link between the real exchange rate and output. Intermediate goods trade also reduces the volatility of the terms of trade relative to the real exchange rate while increasing international output correlations and reducing the correlation between the trade balance and output.

Suggested Citation

  • William D. Craighead, 2020. "Intermediate Goods and Exchange Rate Disconnect," Open Economies Review, Springer, vol. 31(1), pages 113-129, February.
    • Handle: RePEc:kap:openec:v:31:y:2020:i:1:d:10.1007_s11079-019-09538-6
    DOI: 10.1007/s11079-019-09538-6
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    Cited by:

    1. Yuwan Duan & Yanping Zhao & Jakob Haan, 2020. "Exchange Rate Pass-through in China: A Cost-Push Input-Output Price Model," Open Economies Review, Springer, vol. 31(3), pages 513-528, July.

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    More about this item

    Keywords

    Real exchange rate; Exchange rate disconnect; Intermediate goods trade;
    All these keywords.

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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