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Information Frictions and Real Exchange Rate Dynamics

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  • Giacomo Candian

Abstract

The paper provides a novel explanation for the observed large and persistent fluctuations in real exchange rate dynamics using a flexible-price model with dispersed information among firms. The paper extend the imperfect common knowledge model developed by Woodford (2002) and Melosi (2014) to a two-country environment. The model is estimated on US and European data using Bayesian methods. The model successfully explain the volatility and persistence of the US/Euro Area real exchange rate, as well as its high correlation with the nominal exchange rate. In line with the empirical evidence, the estimated model delivers hump-shaped dynamics for real exchange rate and highly persistent effect of monetary disturbances. A battery of results shows that the model with information frictions outperforms traditional sticky-price models of real exchange rates.

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  • Giacomo Candian, 2016. "Information Frictions and Real Exchange Rate Dynamics," EcoMod2016 9106, EcoMod.
  • Handle: RePEc:ekd:009007:9106
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    Cited by:

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    4. Chahrour, Ryan & Stevens, Luminita, 2020. "Price dispersion and the border effect," Journal of Monetary Economics, Elsevier, vol. 116(C), pages 135-146.
    5. Rabe, Collin & Waddle, Andrea, 2020. "The evolution of purchasing power parity," Journal of International Money and Finance, Elsevier, vol. 109(C).

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    More about this item

    Keywords

    US and the Euro Area; Monetary issues; General equilibrium modeling (CGE);
    All these keywords.

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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