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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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  1. Engel, C., 1996. "Accounting for U.S. Real Exchange Rate Changes," Working Papers 96-02, University of Washington, Department of Economics.
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  15. PFANN, Gerard A. & PALM, Franz C., . "Asymmetric adjustment costs in non-linear labour demand models for the Netherlands and U.K. manufacturing sectors," CORE Discussion Papers RP 1044, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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  17. Fay, Jon A & Medoff, James L, 1985. "Labor and Output over the Business Cycle: Some Direct Evidence," American Economic Review, American Economic Association, vol. 75(4), pages 638-55, September.
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  19. Maurice Obstfeld and Kenneth Rogoff., 2000. "The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?," Center for International and Development Economics Research (CIDER) Working Papers C00-112, University of California at Berkeley.
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