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Exchange Rates and Endogenous Productivity

Author

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  • Nils Gornemann
  • Pablo Guerron-Quintana
  • Felipe Saffie

Abstract

Real exchange rates (RERs) display sizable uctuations not only over the business cycle, but also at lower frequencies, resulting in large and persistent swings over decades|facts that many business cycle models struggle to match. We propose an international macroeconomics model with endogenous productivity to rationalize these facts. In the model, endogenous growth amplifies stationary uctuations generating persistent productivity differences between countries that trigger low-frequency cycles in the RER. The estimated model effortlessly replicates the empirical spectrum, autocorrelation, and half-life of the RER. In addition, we document that low frequency movements in aggregate trade ows are crucial to discipline the RER cycles. Finally, we validate the model-implied co-movement between relative prices and technology differentials using a panel of cross industry-country data on patent and industry prices.

Suggested Citation

  • Nils Gornemann & Pablo Guerron-Quintana & Felipe Saffie, 2020. "Exchange Rates and Endogenous Productivity," International Finance Discussion Papers 1301, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgif:1301
    DOI: 10.17016/IFDP.2020.1301
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    File URL: https://www.federalreserve.gov/econres/ifdp/files/ifdp1301.pdf
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    References listed on IDEAS

    as
    1. Andrea Raffo, 2008. "Technology Shocks: Novel Implications for International Business Cycles," 2008 Meeting Papers 511, Society for Economic Dynamics.
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    3. Ohanian, Lee E. & Raffo, Andrea, 2012. "Aggregate hours worked in OECD countries: New measurement and implications for business cycles," Journal of Monetary Economics, Elsevier, vol. 59(1), pages 40-56.
    4. Cascaldi-Garcia, Danilo & Vukotic, Marija, 2019. "Patent-Based News Shocks," The Warwick Economics Research Paper Series (TWERPS) 1225, University of Warwick, Department of Economics.
    5. Christoph E. Boehm & Andrei A. Levchenko & Nitya Pandalai-Nayar, 2020. "The Long and Short (Run) of Trade Elasticities," NBER Working Papers 27064, National Bureau of Economic Research, Inc.
    6. Jeffrey R. Campbell & Jonas D. M. Fisher & Alejandro Justiniano & Leonardo Melosi, 2017. "Forward Guidance and Macroeconomic Outcomes since the Financial Crisis," NBER Macroeconomics Annual, University of Chicago Press, vol. 31(1), pages 283-357.
    7. Felipe Benguria & Felipe Saffie & Hidehiko Matsumoto, 2019. "Productivity and Trade Dynamics in Sudden Stops," 2019 Meeting Papers 1378, Society for Economic Dynamics.
    8. 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.
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    More about this item

    Keywords

    Real exchange rate; Endogenous growth; RBC;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles

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