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Productivity Shocks and Delayed Exchange-Rate Overshooting

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  • Christian Pierdzioch

Abstract

This paper uses a ‘new open economy macroeconomics’ model to study the effect of a productivity shock on exchange rate dynamics. The special features of the model are that households’ preferences exhibit a "catching up with the Joneses" effect and that international financial markets are imperfectly integrated. Numerical simulations of the model are used to demonstrate that these features imply that, in an otherwise standard ‘new open economy macroeconomics’ model, a productivity shock can give rise to a delayed overshooting of the exchange rate.

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Bibliographic Info

Paper provided by Kiel Institute for the World Economy in its series Kiel Working Papers with number 1199.

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Length: 26 pages
Date of creation: Feb 2004
Date of revision:
Handle: RePEc:kie:kieliw:1199

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Keywords: Productivity shock; Exchange rate overshooting;

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