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Why Is the Business-Cycle Behavior of Fundamentals Alike Across Exchange-Rate Regimes?

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  • Luca Dedola

    ()
    (Research Department, Bank of Italy)

  • Sylvain Leduc

    ()
    (Federal Reserve Bank of Philadelphia)

Abstract

Since the adoption of flexible exchange rates, real exchange rates have been much more volatile than they were under Bretton Woods. However, the volatilities of most other macroeconomic variables have remained approximately unchanged. This poses a puzzle for standard international business cycle models. This paper develops a two-country, two-sector model with nominal rigidities featuring deviations from the law of one price due to firms setting prices in buyersÂ’ currencies. By partially insulating goods markets across countries and thus mitigating the international expenditure-switching effect, this pricing behavior is found to considerably dampen the responses of quantities to shocks hitting the economies therefore helping to account for the puzzle.

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Paper provided by Oesterreichische Nationalbank (Austrian Central Bank) in its series Working Papers with number 53.

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Date of creation: 01 Oct 2001
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Handle: RePEc:onb:oenbwp:53

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Cited by:
  1. Riccardo Cristadoro & Andrea Gerali & Stefano Neri & Massimiliano Pisani, 2006. "Nominal Rigidities in an Estimated Two Country," Computing in Economics and Finance 2006 162, Society for Computational Economics.
  2. Reinhart, Carmen, 2002. "A Modern History of Exchange Rate Arrangements: Chartbook, 1946-2001," MPRA Paper 13192, University Library of Munich, Germany.
  3. Giancarlo Corsetti & Luca Dedola & Sylvain Leduc, 2005. "DSGE Models of High Exchange-Rate Volatility and Low Pass-Through," Economics Working Papers ECO2005/23, European University Institute.
  4. Calderon, Cesar & Kubota, Megumi, 2009. "Does higher openness cause more real exchange rate volatility ?," Policy Research Working Paper Series 4896, The World Bank.
  5. Kollmann, Robert, 2002. "Monetary Policy Rules in the Open Economy: Effects on Welfare and Business Cycles," CEPR Discussion Papers 3279, C.E.P.R. Discussion Papers.
  6. Sopraseuth, T., 2000. "Exchange Rate Regimes and International Business Cycle," Papiers d'Economie Mathématique et Applications 2000.17, Université Panthéon-Sorbonne (Paris 1).
  7. Reinhart, Carmen, 2002. "A Modern History of Exchange Rate Arrangements: The Country Histories, 1946-2001," MPRA Paper 13191, University Library of Munich, Germany.
  8. Kollmann, Robert, 2004. "Macroeconomic Effects of Nominal Exchange Rate Regimes: New Insights into the Role of Price Dynamics," CEPR Discussion Papers 4487, C.E.P.R. Discussion Papers.
  9. Carmen M. Reinhart & Kenneth S. Rogoff, 2004. "The Modern History of Exchange Rate Arrangements: A Reinterpretation," The Quarterly Journal of Economics, MIT Press, vol. 119(1), pages 1-48, February.
  10. Stavarek, Daniel, 2013. "Cyclical relationship between exchange rates and macro-fundamentals in Central and Eastern Europe," MPRA Paper 45327, University Library of Munich, Germany.
  11. Reinhart, Carmen, 2002. "A Modern History of Exchange Rate Arrangements: Parallel Markets and Dual and Multiple Exchange Rates," MPRA Paper 13194, University Library of Munich, Germany.

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