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International Business Cycles and Exchange Rates

International real business cycle models are not able to account for the high volatility of imports, exports, the trade balance and the terms of trade. By introducing exogenous exchange rate movements in addition to standard technological shocks, the model presented here comes much closer to replicating the relatively high volatility observed in the data while also improving other moments. Les modèles internationaux du cycle réel ne sont pas capable de répliquer la forte volatilité des exportations, des importations, de la balance commerciale et des termes de l'échange. En introduisant des mouvements exogènes des taux de change, en plus des chocs technologiques usuels, le modè présenté ici parvient bien mieux à répliquer la relativement forte volatilité observée dans les données tout en améliorant d'autres statistiques.

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Paper provided by CREFE, Université du Québec à Montréal in its series Cahiers de recherche CREFE / CREFE Working Papers with number 33.

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Length: 24 pages
Date of creation: Dec 1994
Date of revision: Jul 1997
Publication status: Forthcoming in Review of International Economics
Handle: RePEc:cre:crefwp:33
Contact details of provider: Postal: P.O. Box 8888, Downtown Station, Montreal (Canada) Quebec, H3C 3P8
Phone: (514) 987-6181
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Web page: http://ideas.uqam.ca/CREFE/
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  1. Alan C. Stockman, 1988. "Real Exchange Rate Variability under Pegged and Floating Nominal Exchange Rate Systems: An Equilibrium Theory," NBER Working Papers 2565, National Bureau of Economic Research, Inc.
  2. Finn, Mary G., 1986. "Forecasting the exchange rate: A monetary or random walk phenomenon?," Journal of International Money and Finance, Elsevier, vol. 5(2), pages 181-193, June.
  3. Robert J. Hodrick & Edward Prescott, 1981. "Post-War U.S. Business Cycles: An Empirical Investigation," Discussion Papers 451, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  4. Robert E. Cumby & Maurice Obstfeld, 1984. "International Interest Rate and Price Level Linkages under Flexible Exchange Rates: A Review of Recent Evidence," NBER Chapters, in: Exchange Rate Theory and Practice, pages 121-152 National Bureau of Economic Research, Inc.
  5. David K. Backus & Patrick J. Kehoe & Finn E. Kydland, 1991. "International real business cycles," Staff Report 146, Federal Reserve Bank of Minneapolis.
  6. Christian Zimmermann, 1994. "Technology Innovations and the Volatility of Output: An International Perspective," Cahiers de recherche CREFE / CREFE Working Papers 34, CREFE, Université du Québec à Montréal.
  7. David K. Backus & Patrick J. Kehoe & Finn E. Kydland, 1992. "Dynamics of the trade balance and the terms of trade: the S-curve," Working Paper 9211, Federal Reserve Bank of Cleveland.
  8. John Whalley, 1984. "Trade Liberalization among Major World Trading Areas," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262231204, June.
  9. Christian Zimmermann, 1996. "International Real Business Cycles among Heterogeneous Countries," Macroeconomics 9607002, EconWPA.
  10. Don E. Schlagenhauf & Jeffrey M. Wrase, 1992. "Liquidity and real activity in a simple open economy model," Discussion Paper / Institute for Empirical Macroeconomics 57, Federal Reserve Bank of Minneapolis.
  11. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November.
  12. Meese, Richard, 1990. "Currency Fluctuations in the Post-Bretton Woods Era," Journal of Economic Perspectives, American Economic Association, vol. 4(1), pages 117-34, Winter.
  13. Marianne Baxter & Alan C. Stockman, 1988. "Business Cycles and the Exchange Rate System: Some International Evidence," NBER Working Papers 2689, National Bureau of Economic Research, Inc.
  14. Gerlach, H M Stefan, 1988. "World Business Cycles under Fixed and Flexible Exchange Rates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 20(4), pages 621-32, November.
  15. Meese, Richard A & Rose, Andrew K, 1990. "Nonlinear, Nonparametric, Nonessential Exchange Rate Estimation," American Economic Review, American Economic Association, vol. 80(2), pages 192-96, May.
  16. Baxter, Marianne & Stockman, Alan C., 1989. "Business cycles and the exchange-rate regime : Some international evidence," Journal of Monetary Economics, Elsevier, vol. 23(3), pages 377-400, May.
  17. Don E. Schlagenhauf & Jeffry M. Wrase, 1992. "A monetary, open-economy model with capital mobility," Discussion Paper / Institute for Empirical Macroeconomics 67, Federal Reserve Bank of Minneapolis.
  18. David Backus, 1982. "Empirical Models of the Exchange Rate: Separating the Wheat from the Chaff," Working Papers 463, Queen's University, Department of Economics.
  19. Flood, Robert P., 1987. "Comments on speculation and the volatility of foreign currency exchange rates," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 26(1), pages 57-62, January.
  20. CARMICHAEL, Benoît, 1994. "Exchange Rate Determination in a Two-Country Model with Liquidity Shocks," Cahiers de recherche 9410, Université Laval - Département d'économique.
  21. Boughton, James M., 1987. "Tests of the performance of reduced-form exchange rate models," Journal of International Economics, Elsevier, vol. 23(1-2), pages 41-56, August.
  22. Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, vol. 14(1-2), pages 3-24, February.
  23. Singleton, Kenneth, 1987. "Speculation and the volatility of foreign currency exchange rates," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 26(1), pages 9-56, January.
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