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Real Exchange Rate Persistence in Dynamic General-Equilibrium Sticky-Price Models: An Analytical Characterization

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Hafedh Bouakez

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Abstract

This paper assesses analytically the ability of dynamic general-equilibrium sticky-price models to generate persistent real exchange rate fluctuations. It develops a tractable general-equilibrium model with Calvo-type price stickiness. The model has a closed-form solution and the persistence of the real exchange rate is explicitly characterized. The paper shows that real exchange rate persistence is pinned down by the probability of not changing prices. This result suggests that standard sticky-price models are unable to generate endogenous persistence.

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File URL: http://www.bankofcanada.ca/en/res/wp/2003/wp03-35.pdf
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Paper provided by Bank of Canada in its series Working Papers with number 03-35.

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Length: 30 pages
Date of creation: 2003
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Handle: RePEc:bca:bocawp:03-35

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

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  1. Engel, Charles, 1993. "Real exchange rates and relative prices : An empirical investigation," Journal of Monetary Economics, Elsevier, vol. 32(1), pages 35-50, August. [Downloadable!] (restricted)
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  2. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2000. "Sticky Price Models of the Business Cycle: Can the Contract Multiplier Solve the Persistence Problem?," Econometrica, Econometric Society, vol. 68(5), pages 1151-1180, September.
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  3. Bergin, Paul R. & Feenstra, Robert C., 2001. "Pricing-to-market, staggered contracts, and real exchange rate persistence," Journal of International Economics, Elsevier, vol. 54(2), pages 333-359, August. [Downloadable!] (restricted)
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  4. Engel, Charles & Rogers, John H, 1996. "How Wide Is the Border?," American Economic Review, American Economic Association, vol. 86(5), pages 1112-25, December. [Downloadable!] (restricted)
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  5. Kollman, R., 1996. "The Exchange Rate in a Dynamic-Optimizing Current Account Model with Nominal Rigidities: A Quantitative Investigation," Cahiers de recherche 9614, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
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  6. Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, vol. 48(5), pages 1305-11, July. [Downloadable!] (restricted)
  7. Ng, Serena, 2003. "Can sticky prices account for the variations and persistence in real exchange rates?," Journal of International Money and Finance, Elsevier, vol. 22(1), pages 65-85, February. [Downloadable!] (restricted)
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  8. Mankiw, N Gregory & Summers, Lawrence H, 1986. "Money Demand and the Effects of Fiscal Policies," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 18(4), pages 415-29, November. [Downloadable!] (restricted)
  9. Betts, Caroline & Devereux, Michael B., 1996. "The exchange rate in a model of pricing-to-market," European Economic Review, Elsevier, vol. 40(3-5), pages 1007-1021, April. [Downloadable!] (restricted)
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