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Real Exchange Rate Persistence in Dynamic General-Equilibrium Sticky-Price Models: An Analytical Characterization

  • Hafedh Bouakez

This paper assesses analytically the ability of dynamic general-equilibrium sticky-price models to generate persistent real exchange rate fluctuations. It develops a tractable general-equilibrium model with Calvo-type price stickiness. The model has a closed-form solution and the persistence of the real exchange rate is explicitly characterized. The paper shows that real exchange rate persistence is pinned down by the probability of not changing prices. This result suggests that standard sticky-price models are unable to generate endogenous persistence.

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File URL: http://www.bankofcanada.ca/wp-content/uploads/2010/02/wp03-35.pdf
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Paper provided by Bank of Canada in its series Working Papers with number 03-35.

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Length: 30 pages
Date of creation: 2003
Date of revision:
Handle: RePEc:bca:bocawp:03-35
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  1. Kollman, R., 1996. "The Exchange Rate in a Dynamic-Optimizing Current Account Model with Nominal Rigidities: A Quantitative Investigation," Cahiers de recherche 9614, Centre interuniversitaire de recherche en ├ęconomie quantitative, CIREQ.
  2. Paul R. Bergin & Robert C. Feenstra, . "Pricing To Market, Staggered Contracts, And Real Exchange Rate Persistence," Department of Economics 99-01, California Davis - Department of Economics.
  3. Serena Ng, 2001. "Can Sticky Prices Account for the Variations and Persistence in Real Exchange Rates?," Economics Working Paper Archive 468, The Johns Hopkins University,Department of Economics.
  4. Betts, Caroline & Devereux, Michael B., 1996. "The exchange rate in a model of pricing-to-market," European Economic Review, Elsevier, vol. 40(3-5), pages 1007-1021, April.
  5. Charles Engel, 1992. "Real Exchange Rates and Relative Prices: An Empirical Investigation," NBER Working Papers 4231, National Bureau of Economic Research, Inc.
  6. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 1996. "Sticky Price Models of the Business Cycle: Can the Contract Multiplier Solve the Persistence Problem?," NBER Working Papers 5809, National Bureau of Economic Research, Inc.
  7. Engel, C. & Rogers, J.H., 1995. "How Wide is the Border?," Papers 4-95-16, Pennsylvania State - Department of Economics.
  8. Mankiw, N Gregory & Summers, Lawrence H, 1986. "Money Demand and the Effects of Fiscal Policies," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 18(4), pages 415-29, November.
  9. Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, vol. 48(5), pages 1305-11, July.
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