IDEAS home Printed from https://ideas.repec.org/p/fip/feddgw/16.html
   My bibliography  Save this paper

Technical note on "The real exchange rate in sticky price models: does investment matter?"

Author

Listed:

Abstract

This technical note is developed in part as a mathematical companion to the paper ‘The Real Exchange Rate in Sticky Price Models: Does Investment Matter?’ (GMPI working paper no. 17). Our two-country model incorporates capital accumulation with adjustment costs, variable capital utilization and investment-specific technological shocks. Nominal rigidities and monopolistic competition distort the goods markets of each country and allow monetary policy to have real effects. We investigate two different international pricing scenarios, local-currency pricing (where the law of one price fails) and producer-currency pricing (where the law of one price holds). This technical note contains three basic calculations. First, we derive the equilibrium conditions of the open economy model under local-currency pricing and producer-currency pricing. Second, we compute the zero-inflation, zero-trade balance (deterministic) steady state. Third, we describe the log-linearization of the equilibrium conditions around the deterministic steady state. Simultaneously, commentary is provided whenever necessary to enhance the model description and to place the assumptions embedded in our DSGE framework into context.

Suggested Citation

  • Martinez-Garcia, Enrique & Søndergaard, Jens, 2008. "Technical note on "The real exchange rate in sticky price models: does investment matter?"," Globalization and Monetary Policy Institute Working Paper 16, Federal Reserve Bank of Dallas, revised 01 Nov 2010.
  • Handle: RePEc:fip:feddgw:16
    as

    Download full text from publisher

    File URL: http://dallasfed.org/assets/documents/institute/wpapers/2008/0016.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. V. V Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2002. "Can Sticky Price Models Generate Volatile and Persistent Real Exchange Rates?," Review of Economic Studies, Oxford University Press, vol. 69(3), pages 533-563.
    2. Jón Steinsson, 2008. "The Dynamic Behavior of the Real Exchange Rate in Sticky Price Models," American Economic Review, American Economic Association, pages 519-533.
    3. Engel, Charles & Wang, Jian, 2011. "International trade in durable goods: Understanding volatility, cyclicality, and elasticities," Journal of International Economics, Elsevier, pages 37-52.
    4. Jordi Galí & Tommaso Monacelli, 2005. "Monetary Policy and Exchange Rate Volatility in a Small Open Economy," Review of Economic Studies, Oxford University Press, vol. 72(3), pages 707-734.
    5. Warnock, Francis E., 2003. "Exchange rate dynamics and the welfare effects of monetary policy in a two-country model with home-product bias," Journal of International Money and Finance, Elsevier, vol. 22(3), pages 343-363, June.
    6. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2005. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 113(1), pages 1-45, February.
    7. Engel, Charles & Wang, Jian, 2011. "International trade in durable goods: Understanding volatility, cyclicality, and elasticities," Journal of International Economics, Elsevier, pages 37-52.
    8. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
    9. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, pages 195-214.
    10. Frank Smets & Raf Wouters, 2003. "An Estimated Dynamic Stochastic General Equilibrium Model of the Euro Area," Journal of the European Economic Association, MIT Press, vol. 1(5), pages 1123-1175, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Kateryna Onishchenko, 2012. "Can a pure real business cycle model explain the real exchange rate: the case of Ukraine," International Journal of Sustainable Economy, Inderscience Enterprises Ltd, pages 111-135.
    2. Martinez-Garcia, Enrique & Søndergaard, Jens, 2008. "The real exchange rate in sticky price models: does investment matter?," Globalization and Monetary Policy Institute Working Paper 17, Federal Reserve Bank of Dallas.
    3. Martinez-Garcia, Enrique & Sondergaard, Jens, 2009. "Investment and trade patterns in a sticky-price, open-economy model," Globalization and Monetary Policy Institute Working Paper 28, Federal Reserve Bank of Dallas.
    4. Carvalho, Carlos & Nechio, Fernanda & Yao, Fang, 2014. "Monetary Policy and Real Exchange Rate Dynamics in Sticky-Price Models," Working Paper Series 2014-17, Federal Reserve Bank of San Francisco, revised Sep 2017.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:feddgw:16. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Amy Chapman). General contact details of provider: http://edirc.repec.org/data/frbdaus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.