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Volatility, Persistence and Nonlinearity of Simulated DSGE Real Exchange Rates

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  • Yamin Ahmad

    () (Department of Economics, University of Wisconsin - Whitewater)

  • Ming Chien Lo

    () (Department of Economics, St Cloud State University)

  • Olena Mykhaylova

    () (Department of Economics, University of Richmond)

Abstract

This paper investigates the time series properties of real exchange rates series produced by DSGE models. We simulate a variety of new open economy DSGE models that incorporate features such as local currency pricing, home bias, non-traded goods and incomplete markets. We attempt to ascertain whether the dynamics of the real exchange rate in this class of models are consistent with those found in the time series literature using data from the current floating period. Although none of the basic specifications we consider match the volatility in the raw data, our findings suggest that home bias in consumption and non-traded goods are the key components of DSGE models that are able to generate persistent real exchange rates, comparable to that in the data. Moreover, we find that some of the structural micro-level nonlinearity embedded within DSGE models may be represented as macro-level nonlinearity in the form of a smooth transition autoregressive process, which has previously been found to pprsimoniously characterize the dynamics of real exchange rates in the time series literature.

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Bibliographic Info

Paper provided by UW-Whitewater, Department of Economics in its series Working Papers with number 11-01.

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Length: 54 pages
Date of creation: Jan 2011
Date of revision: Jul 2011
Handle: RePEc:uww:wpaper:11-01

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Postal: Whitewater, WI 53190-1750
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Web page: http://www.uww.edu/cobe/economics/main.html
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Related research

Keywords: Real Exchange Rate Dynamics; Nonlinear Dynamics; DSGE Modeling; Smooth Transition Estimation; Simulations;

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References

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  1. Volatility, Persistence and Nonlinearity of Simulated DSGE Real Exchange Rates
    by Christian Zimmermann in NEP-DGE blog on 2011-08-20 22:22:48

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