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Real exchange rate volatility and disconnect: an empirical investigation

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Author Info
Riccardo Cristadoro () (Bank of Italy, Economic Outlook and Monetary Policy Research Department)
Andrea Gerali () (Bank of Italy, Economic Outlook and Monetary Policy Research Department)
Stefano Neri () (Bank of Italy, Economic Outlook and Monetary Policy Research Department)
Massimiliano Pisani () (Bank of Italy, Economic Outlook and Monetary Policy Research Department)

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Abstract

A two-country model that incorporates many features proposed in the New Open Economy Macroeconomics literature is developed in order to replicate the volatility of the real exchange rate and its disconnect with macroeconomic variables. The model is estimated using data for the euro area and the U.S. and Bayesian methods. The analysis delivers the following results: (a) international price discrimination, home bias and shocks to the uncovered interest rate parity (UIRP) condition are key features to replicate the variance of the real exchange rate; (b) home bias, shocks to the UIRP condition and to production technologies help replicating the disconnect;(c) distribution services intensive in local nontradeables are an important source of international price discrimination.

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Publisher Info
Paper provided by Bank of Italy, Economic Research Department in its series Temi di discussione (Economic working papers) with number 660.

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Date of creation: Apr 2008
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Handle: RePEc:bdi:wptemi:td_660_08

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Related research
Keywords: International business cycle; Exchange rate volatility; Exchange rate pass-through; International transmission.;

Find related papers by JEL classification:
F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Bayesian Analysis

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