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Information Frictions and Real Exchange Rate Dynamics

Listed author(s):
  • Giacomo Candian
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    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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    Paper provided by EcoMod in its series EcoMod2016 with number 9106.

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    Date of creation: 04 Jul 2016
    Handle: RePEc:ekd:009007:9106
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