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Monetary Shocks and Real Exchange Rate Dynamics: a Reappraisal

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  • Jean-Olivier Hairault
  • Thepthida Sopraseuth

Abstract

This paper proposes a two-country general-equilibrium model incorporating a tradable sector with pricing-to-market as well as a nontradable sector. In that case, real exchange rate fluctuations arise from two sources: changes in the relative price of traded goods, that exemplify deviations from the law of one price, and movements in the relative price of traded to nontraded goods across countries. Our framework sheds light on the propagation mechanisms through which monetary shocks affect the real exchange rate. More specifically, the two components respond in opposite directions to monetary disturbances, which is consistent with data. Besides, the introduction of nontraded goods does not alter the predictive power of monetary shocks because the presence of nontraded goods magnifies the response of the deviation from the law of one price. Copyright Blackwell Publishing Ltd 2005..

Suggested Citation

  • Jean-Olivier Hairault & Thepthida Sopraseuth, 2005. "Monetary Shocks and Real Exchange Rate Dynamics: a Reappraisal," Review of International Economics, Wiley Blackwell, vol. 13(3), pages 576-596, August.
  • Handle: RePEc:bla:reviec:v:13:y:2005:i:3:p:576-596
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    References listed on IDEAS

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    1. 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 168-185, March.
    2. repec:cdl:ucsbec:16-90 is not listed on IDEAS
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    Cited by:

    1. Romain Restout, 2008. "Monopolistic Competition and the Dependent Economy Model," Working Papers 0803, Groupe d'Analyse et de Théorie Economique Lyon St-Étienne (GATE Lyon St-Étienne), Université de Lyon.

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