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Pricing To Market, Staggered Contracts, And Real Exchange Rate Persistence

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  • Paul R. Bergin
  • Robert C. Feenstra

Abstract

This paper offers an explanation for the persistence observed in real exchange rate movements. The model combines pricing to market behavior with sticky prices generated by staggered contracts. A translog preference structure is used to enhance both features. The paper finds that openness limits the degree of endogenous persistence. Nevertheless, the model under reasonable parameter values can replicate the serial correlation of real exchange rate data. Further, significant exchange rate volatility can be generated, and this is amplified by the presence of endogenous persistence.

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Paper provided by California Davis - Department of Economics in its series Department of Economics with number 99-01.

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Handle: RePEc:fth:caldec:99-01

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Postal: University of California Davis - Department of Economics. One Shields Ave., California 95616-8578
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Web page: http://www.econ.ucdavis.edu/
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