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Cointegrated TFP Processes and International Business Cycles

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  • Vicente Tuesta
  • Juan F. Rubio-Ramirez
  • Pau Rabanal

Abstract

A puzzle in international macroeconomics is that observed real exchange rates are highly volatile. Standard international real business cycle (IRBC) models cannot reproduce this fact. We show that TFP processes for the U.S. and the "rest of the world," is characterized by a vector error correction (VECM) and that adding cointegrated technology shocks to the standard IRBC model helps explaining the observed high real exchange rate volatility. Also we show that the observed increase of the real exchange rate volatility with respect to output in the last 20 year can be explained by changes in the parameter of the VECM.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 09/212.

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Length: 54
Date of creation: 01 Sep 2009
Date of revision:
Handle: RePEc:imf:imfwpa:09/212

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Keywords: Consumer goods; Economic models; Exchange rates; External shocks; Industrial production; Price elasticity; Prices; Private consumption; Productivity; Real effective exchange rates; Spillovers; exchange rate; real exchange rate; exchange rate volatility; real exchange rate volatility; business cycles; real exchange rate fluctuations; real business cycle; exchange rate increases; effective exchange rate; real exchange rates; business cycle; exchange rate depreciation; exchange rate fluctuations; real exchange rate depreciation; nominal exchange rates; real effective exchange rate; real exchange rate changes; basket of currencies; real gdp; total factor productivity; real exchange rate dynamics; real exchange rate movements; business cycle dynamics; exchange rate changes; effective exchange rates; exchange rate dynamics;

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