Real exchange rate dynamics in sticky-price models with capital
AbstractThe standard argument for abstracting from capital accumulation in sticky-price macro models is based on their short-run focus: over this horizon, capital does not move much. This argument is more problematic in the context of real exchange rate (RER) dynamics, which are very persistent. In this paper we study RER dynamics in sticky-price models with capital accumulation. We analyze both a model with an economy-wide rental market for homogeneous capital, and an economy in which capital is sector specific. We find that, in response to monetary shocks, capital increases the persistence and reduces the volatility of RERs. Nevertheless, versions of the multi-sector sticky-price model of Carvalho and Nechio (2011) augmented with capital accumulation can match the persistence and volatility of RERs seen in the data, irrespective of the type of capital. When comparing the implications of capital specificity, we find that, perhaps surprisingly, switching from economy-wide capital markets to sector-specific capital tends to decrease the persistence of RERs in response to monetary shocks. Finally, we study how RER dynamics are affected by monetary policy and find that the source of interest rate persistence - policy inertia or persistent policy shocks - is key.
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Bibliographic InfoPaper provided by Federal Reserve Bank of San Francisco in its series Working Paper Series with number 2012-08.
Date of creation: 2012
Date of revision:
Other versions of this item:
- Fernanda Nechio & Carlos Carvalho, 2013. "Real Exchange Rate Dynamics in Sticky-Price Models with Capital," 2013 Meeting Papers 236, Society for Economic Dynamics.
- NEP-ALL-2012-07-29 (All new papers)
- NEP-CBA-2012-07-29 (Central Banking)
- NEP-MAC-2012-07-29 (Macroeconomics)
- NEP-MON-2012-07-29 (Monetary Economics)
- NEP-OPM-2012-07-29 (Open Economy Macroeconomic)
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.:
- Olivier Coibion & Yuriy Gorodnichenko, 2012.
"Why Are Target Interest Rate Changes So Persistent?,"
American Economic Journal: Macroeconomics,
American Economic Association, vol. 4(4), pages 126-62, October.
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- Olivier Coibion & Yuriy Gorodnichenko, 2011. "Why Are Target Interest Rate Changes So Persistent?," NBER Working Papers 16707, National Bureau of Economic Research, Inc.
- Carlos Carvalho & Fernanda Nechio, 2011.
"Aggregation and the PPP Puzzle in a Sticky-Price Model,"
American Economic Review,
American Economic Association, vol. 101(6), pages 2391-2424, October.
- Carlos Carvalho & Fernanda Nechio, 2008. "Aggregation and the PPP puzzle in a sticky-price model," Staff Reports 351, Federal Reserve Bank of New York.
- Carlos Carvalho & Fernanda Nechio, 2010. "Aggregation and the PPP puzzle in a sticky-price model," Working Paper Series 2010-06, Federal Reserve Bank of San Francisco.
- Emi Nakamura & Jón Steinsson, 2008. "Five Facts about Prices: A Reevaluation of Menu Cost Models," The Quarterly Journal of Economics, MIT Press, vol. 123(4), pages 1415-1464, November.
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