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Can International Macroeconomic Models Explain Low-Frequency Movements of Real Exchange Rates?

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Author Info

  • Pau Rabanal
  • Juan F. Rubio-Ramirez

Abstract

Real exchange rates exhibit important low-frequency fluctuations. This makes the analysis of real exchange rates at all frequencies a more sound exercise than the typical business cycle one, which compares actual and simulated data after the Hodrick-Prescott filter is applied to both. A simple two-country, two-good model, as described in Heathcote and Perri (2002), can explain the volatility of the real exchange rate when all frequencies are studied. The puzzle is that the model generates too much persistence of the real exchange rate instead of too little, as the business cycle analysis asserts. Finally, we show that the introduction of adjustment costs in production and in portfolio holdings allows us to reconcile theory and this feature of the data.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 12/13.

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Length: 42
Date of creation: 01 Jan 2012
Date of revision:
Handle: RePEc:imf:imfwpa:12/13

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Related research

Keywords: Economic models; Real effective exchange rates; intermediate goods; elasticity of substitution; business cycles; business cycle; output growth; growth rates; imported inputs; intermediate inputs; open economy; real gdp; terms of trade; transmission of shocks; trade deficit; net exports; political economy; total factor productivity; zero profits; real business cycle; imported intermediate; transmission of productivity; constant elasticity of substitution; foreign trade; trade partners; elasticity ? of substitution;

This paper has been announced in the following NEP Reports:

References

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  1. Bergin, Paul R. & Feenstra, Robert C., 2001. "Pricing-to-market, staggered contracts, and real exchange rate persistence," Journal of International Economics, Elsevier, vol. 54(2), pages 333-359, August.
  2. Giancarlo Corsetti & Luca Dedola & Sylvain Leduc, 2003. "International risk-sharing and the transmission of productivity shocks," Working Papers 03-19, Federal Reserve Bank of Philadelphia.
  3. Bouakez, Hafedh, 2005. "Nominal rigidity, desired markup variations, and real exchange rate persistence," Journal of International Economics, Elsevier, vol. 66(1), pages 49-74, May.
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  25. repec:cdl:ucscec:8417 is not listed on IDEAS
  26. Haroon Mumtaz & Paolo Surico, 2009. "The Transmission of International Shocks: A Factor-Augmented VAR Approach," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(s1), pages 71-100, 02.
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Citations

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Cited by:
  1. Jonathan Heathcote & Fabrizio Perri, 2013. "Assessing International Efficiency," Working Papers 476, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  2. Corsetti, Giancarlo & Dedola, Luca & Viani, Francesca, 2011. "The International Risk-Sharing Puzzle is at Business Cycle and Lower Frequency," CEPR Discussion Papers 8355, C.E.P.R. Discussion Papers.
  3. Corsetti, Giancarlo & Dedola, Luca & Viani, Francesca, 2011. "Traded and nontraded goods prices, and international risk sharing: an empirical investigation," CEPR Discussion Papers 8613, C.E.P.R. Discussion Papers.
  4. Yamin Ahmad & Ming Chien Lo & Olena Mykhaylova, 2012. "Causes of Nonlinearities in low order models of the real exchange rate," Working Papers 12-01, UW-Whitewater, Department of Economics, revised Mar 2013.
  5. Llosa, Luis-Gonzalo, 2013. "How Do Terms of Trade Affect Productivity? The Role of Monopolistic Output Markets," Working Papers 2013-007, Banco Central de Reserva del Perú.

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