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On exchange rate regimes, exchange rate fluctuations, and fundamentals

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Author Info

  • Luca Dedola
  • Sylvain Leduc

Abstract

The authors develop a two-country, two-sector general equilibrium business cycle model with nominal rigidities featuring deviations from the law of one price. The paper shows that a model with these features can quantitatively account for the empirical fact that of the statistical properties of most macroeconomic variables, only the volatility of the real and nominal exchange rates has dramatically changed after the fall of the Bretton Woods system. In particular, the authors replicate some explicit nonstructural tests proposed in the literature with simulated data from their artificial economy. The authors find that while the variability of observed fundamentals (e.g., output, money supply, and interest rates) is barely affected by the exchange rate regime, that of the exchange rate increases substantially under flexible rates.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 99-16.

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Date of creation: 1999
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Handle: RePEc:fip:fedpwp:99-16

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Keywords: Foreign exchange rates;

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References

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Cited by:
  1. Saadet Kasman & Duygu Ayhan, 2006. "Macroeconomic Volatility under Alternative Exchange Rate Regimes in Turkey," Central Bank Review, Research and Monetary Policy Department, Central Bank of the Republic of Turkey, vol. 6(2), pages 37-58.
  2. Michael B. Devereux, 2004. "Exchange Rate Policy and Endogenous Price Flexibility," Working Papers 202004, Hong Kong Institute for Monetary Research.

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