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Exchange Rate Dynamics under Financial Market Frictions

Author

Listed:
  • Hyunjoo Ryou

    () (Bank of Korea)

  • Cristina Terra

    () (Université de Cergy-Pontoise, THEMA)

Abstract

This paper extends Dornbusch's overshooting model by proposing a generalized interest parity condition (GIP), which captures a sluggish adjustment on the asset market. The exchange rate model under the GIP is able to reproduce the delayed overshooting and the hump-shaped response to monetary shocks of both nominal and real exchange rates. Furthermore, we present empirical results for OECD member countries which fit the theoretical predictions.

Suggested Citation

  • Hyunjoo Ryou & Cristina Terra, 2015. "Exchange Rate Dynamics under Financial Market Frictions," THEMA Working Papers 2015-03, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
  • Handle: RePEc:ema:worpap:2015-03
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    References listed on IDEAS

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    More about this item

    Keywords

    Exchange rates; Interest rate parity; Overshooting; Purchasing power parity puzzle; Monetary policy;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F47 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Forecasting and Simulation: Models and Applications

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