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Volatile and persistent real exchange rates without the contrivance of sticky prices

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  • Roche, M.J.

    ()
    (Department of Economics, Finance and Accounting, National University of Ireland, Maynooth, Ireland.)

  • Moore. M.J.

    ()
    (Queen’s University Belfast, Northern Ireland)

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    Abstract

    The flexible-price two-country monetary model is extended to include a consumption externality with habit persistence. The model is simulated using the artificial economy methodology. It successfully explains (i) the high volatility of nominal and real exchange rates, (ii) the high correlation between real and nominal rates, and (iii) the persistence of real exchange rates. It offers a neo-classical explanation for the Meese-Rogoff exchange rate forecasting puzzle.

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    Bibliographic Info

    Paper provided by Department of Economics, Finance and Accounting, National University of Ireland - Maynooth in its series Economics, Finance and Accounting Department Working Paper Series with number n1160402.

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    Date of creation: Apr 2002
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    Handle: RePEc:may:mayecw:n1160402

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    Postal: Maynooth, Co. Kildare
    Phone: 353-1-7083728
    Fax: 353-1-7083934
    Web page: http://economics.nuim.ie
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