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Macroeconomic Effects of Nominal Exchange Rate Regimes: New Insights into the Role of Price Dynamics

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Kollmann, Robert

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Abstract

This Paper analyses the effects of pegged and floating exchange rates using a two-country dynamic general equilibrium model that is calibrated to the US and a European aggregate. The model assumes shocks to money, productivity and the interest parity condition. It captures the fact that the sharp increase in nominal exchange rate volatility after the abandonment of the Bretton Woods (BW) system was accompanied by a commensurate rise in real exchange rate volatility, but had no pronounced effect on the volatility of US and European output. This holds irrespective of whether flexible or sticky prices are assumed – which casts doubt on the widespread view that the roughly equal rise in nominal and real exchange rate volatility reflects price stickiness. Flex-prices variants of the model capture better the fact that the correlation between US and European output has been higher in the floating-rate era.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4487.

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Date of creation: Jul 2004
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Handle: RePEc:cpr:ceprdp:4487

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Keywords: international macroeconomics; monetary economics;

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Find related papers by JEL classification:
E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
F30 - International Economics - - International Finance - - - General
F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General

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  1. Cambell Leith & Simon Wren-Lewis, 2006. " The Optimal Monetary Policy Response to Exchange Rate Misalignments," CDMA Conference Paper Series 0605, Centre for Dynamic Macroeconomic Analysis. [Downloadable!]
    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. Benigno, Gianluca & Thoenissen, Christoph, 2006. "Consumption and Real Exchange Rates with Incomplete Markets and Non-Traded Goods," CEPR Discussion Papers 5580, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  4. Arnab Bhattacharjee & Christoph Thoenissen, 2007. "Money and Monetary Policy in DSGE Models," Money Macro and Finance (MMF) Research Group Conference 2006 78, Money Macro and Finance Research Group. [Downloadable!]
  5. Danny Leung, 2008. "Markups in Canada: Have They Changed and Why?," Working Papers 08-8, Bank of Canada. [Downloadable!]
  6. Jonathan Heathcote & Fabrizio Perri, 2002. "Financial Globalization and Real Regionalization," NBER Working Papers 9292, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
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