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Monetary Shocks and Real Exchange Rate Dynamics: A Reappraisal

Author

Listed:
  • Jean-Olivier Hairault

    (EUREQUA - Equipe Universitaire de Recherche en Economie Quantitative - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)

  • Thepthida Sopraseuth

    (PJSE - Paris-Jourdan Sciences Economiques - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique)

Abstract

This paper proposes a two-country general-equilibrium model incorporating a tradable sector with pricing-to-market as well as a nontradable sector. In that case, real exchange rate fluctuations arise from two sources: changes in the relative price of traded goods, that exemplify deviations from the law of one price, and movements in the relative price of traded to nontraded goods across countries. Our framework sheds light on the propagation mechanisms through which monetary shocks affect the real exchange rate. More specifically, the two components respond in opposite directions to monetary disturbances, which is consistent with data. Besides, the introduction of nontraded goods does not alter the predictive power of monetary shocks because the presence of nontraded goods magnifies the response of the deviation from the law of one price.

Suggested Citation

  • Jean-Olivier Hairault & Thepthida Sopraseuth, 2005. "Monetary Shocks and Real Exchange Rate Dynamics: A Reappraisal," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00270302, HAL.
    • Handle: RePEc:hal:cesptp:halshs-00270302
    DOI: 10.1111/j.1467-9396.2005.00524.x
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    Cited by:

    1. Jean-Olivier Hairault & Thepthida Sopraseuth, 2008. "Fluctuations internationales et dynamique du taux de change," Economie & Prévision, La Documentation Française, vol. 0(2), pages 65-91.
    2. Romain Restout, 2008. "Monopolistic Competition and the Dependent Economy Model," Post-Print halshs-00260868, HAL.

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