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The Dynamic Behavior of the Real Exchange Rate in Sticky Price Models

  • J�n Steinsson

Existing empirical evidence suggests that real exchange rates exhibit hump-shaped dynamics. I show that this is a robust fact across nine large, developed economies. This fact can help explain why sticky price business cycle models have been unable to match the persistence of the real exchange rate. I show that, in response to a number of different real shocks, a two-country sticky price business cycle model yields hump-shaped dynamics for the real exchange rate. The hump-shaped dynamics generated by the model are a powerful source of endogenous persistence that allows the model to match the long half-life of the real exchange rate. (JEL F31)

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/aer.98.1.519
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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 98 (2008)
Issue (Month): 1 (March)
Pages: 519-33

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Handle: RePEc:aea:aecrev:v:98:y:2008:i:1:p:519-33
Note: DOI: 10.1257/aer.98.1.519
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