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Real rigidities and real exchange rate volatility

  • Craighead, William D.

This paper shows that certain real rigidities can help explain high volatility of real exchange rates relative to other macroeconomic aggregates. An international real business cycle model is used to demonstrate that real exchange rate volatility increases if (i) it is costly to move labor between sectors and (ii) the consumption of tradable goods requires distribution services. Model dynamics are generated by shocks to productivity and preferences based on sectoral output, employment and consumption data from G-7 countries. The introduction of intersectoral adjustment and distribution costs substantially increases the real exchange rate volatility generated by the model.

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Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 28 (2009)
Issue (Month): 1 (February)
Pages: 135-147

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Handle: RePEc:eee:jimfin:v:28:y:2009:i:1:p:135-147
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  17. Burgess, Simon M & Dolado, Juan J, 1989. "Intertemporal Rules with Variable Speed of Adjustment: An Application to U.K. Manufacturing Employment," Economic Journal, Royal Economic Society, vol. 99(396), pages 347-65, June.
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