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Real Exchange Rate Volatility and Asset Market Structure

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  • Christoph Thoenissen

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Abstract

We examine the influence of financial asset market structure for the volatility of the real exchange rate. Adding distribution costs to two-country two-sector models has been shown to increase the volatility of the terms of trade and thus the real exchange rate. We argue that incomplete markets are a necessary condition for the terms of trade and real exchange rate to display realistic levels of volatility. We also illustrate that for some parameter values, how one models incomplete markets also matters for international business cycle properties of the these models.

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Bibliographic Info

Paper provided by Centre for Dynamic Macroeconomic Analysis in its series CDMA Working Paper Series with number 0609.

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Date of creation: Jul 2006
Date of revision: Oct 2006
Handle: RePEc:san:cdmawp:0609

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Keywords: Real exchange rate volatility; financial market structure; non-traded goods; distribution costs.;

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  1. Corsetti, Giancarlo & Dedola, Luca, 2005. "A macroeconomic model of international price discrimination," Journal of International Economics, Elsevier, vol. 67(1), pages 129-155, September.
  2. Michael Dotsey & Margarida Duarte, 2007. "Nontraded Goods, Market Segmentation, and Exchange Rates," Working Papers tecipa-281, University of Toronto, Department of Economics.
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  4. Engel, C., 1996. "Accounting for U.S. Real Exchange Rate Changes," Discussion Papers in Economics at the University of Washington 96-02, Department of Economics at the University of Washington.
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  7. Stephanie Schmitt-Grohe & Martin Uribe, 2001. "Closing Small Open Economy Models," Departmental Working Papers 200115, Rutgers University, Department of Economics.
  8. Chari, V V & Kehoe, Patrick J & McGrattan, Ellen R, 2002. "Can Sticky Price Models Generate Volatile and Persistent Real Exchange Rates?," Review of Economic Studies, Wiley Blackwell, vol. 69(3), pages 533-63, July.
  9. repec:rus:hseeco:123846 is not listed on IDEAS
  10. David K. Backus & Gregor W. Smith, 1993. "Consumption and Real Exchange Rates in Dynamic Economies with Non-Traded Goods," Working Papers 1252, Queen's University, Department of Economics.
  11. Benigno, Pierpaolo, 2001. "Price Stability with Imperfect Financial Integration," CEPR Discussion Papers 2854, C.E.P.R. Discussion Papers.
  12. V. V Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2002. "Can Sticky Price Models Generate Volatile and Persistent Real Exchange Rates?," Review of Economic Studies, Oxford University Press, vol. 69(3), pages 533-563.
  13. Stockman, Alan C & Tesar, Linda L, 1995. "Tastes and Technology in a Two-Country Model of the Business Cycle: Explaining International Comovements," American Economic Review, American Economic Association, vol. 85(1), pages 168-85, March.
  14. Gianluca Benigno & Christoph Thoenissen, 2003. "Equilibrium Exchange Rates and Supply-Side Performance," Economic Journal, Royal Economic Society, vol. 113(486), pages C103-C124, March.
  15. Mulraine, Millan L. B., 2006. "Real Exchange Rate Dynamics With Endogenous Distribution Costs," MPRA Paper 9, University Library of Munich, Germany.
  16. Benigno, Gianluca & Thoenissen, Christoph, 2006. "Consumption and Real Exchange Rates with Incomplete Markets and Non-Traded Goods," CEPR Discussion Papers 5580, C.E.P.R. Discussion Papers.
  17. Mendoza, Enrique G, 1991. "Real Business Cycles in a Small Open Economy," American Economic Review, American Economic Association, vol. 81(4), pages 797-818, September.
  18. P. Marcelo Oviedo & Rajesh Singh, 2006. "Distribution Costs and International Business Cycles," 2006 Meeting Papers 808, Society for Economic Dynamics.
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Cited by:
  1. Metodij Hadzi-Vaskov, 2008. "Does the Nominal Exchange Rate Explain the Backus-Smith Puzzle? Evidence from the Eurozone," Working Papers 07-32, Utrecht School of Economics.
  2. Parantap Basu & Christoph Thoenissen, 2007. " Investment Frictions and the Relative Price of Investment Goods in an Open Economy Model," CDMA Working Paper Series 0704, Centre for Dynamic Macroeconomic Analysis, revised Aug 2007.

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