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Can Sticky Prices Account for the Variations and Persistence in Real Exchange Rates?

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  • Serena Ng

Abstract

This paper provides an empirical assessment of the importance of sticky prices in accounting for the variations and the persistence in real exchange rates Vector autoregressions with five variables from two countries that always include the United States are estimated Restrictions are imposed to identify a global shock and two sets of country specific output shocks One set of shocks is associated with instantaneous price adjustments while the other has delayed effects on prices Data from the G7 countries reveal that US sticky price shocks are the dominant source of real exchange rate variations But these shocks have reasonably short half-lives and cannot account for the observed real exchange rate persistence Non-sticky price shocks can induce very persistent real exchange rate dynamics even though they account for little of the historical real exchange rate variations

Suggested Citation

  • Serena Ng, 2001. "Can Sticky Prices Account for the Variations and Persistence in Real Exchange Rates?," Economics Working Paper Archive 468, The Johns Hopkins University,Department of Economics.
    • Handle: RePEc:jhu:papers:468
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    2. Ganguly, Srideep & Breuer, Janice Boucher, 2010. "Nominal exchange rate volatility, relative price volatility, and the real exchange rate," Journal of International Money and Finance, Elsevier, vol. 29(5), pages 840-856, September.
    3. Georgios Chortareas & George Kapetanios, 2013. "How Puzzling Is The Ppp Puzzle? An Alternative Half‐Life Measure Of Convergence To Ppp," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 28(3), pages 435-457, April.
    4. Hafedh Bouakez, 2003. "Real Exchange Rate Persistence in Dynamic General-Equilibrium Sticky-Price Models: An Analytical Characterization," Staff Working Papers 03-35, Bank of Canada.
    5. Mohsin, Mohammed & Park, Kihyun, 2015. "Monetary policy in a two-sector dependent economy," Economic Modelling, Elsevier, vol. 46(C), pages 118-129.
    6. John W. Keating & Isaac K. Kanyama, 2015. "Is sticky price adjustment important for output fluctuations?," Review of Keynesian Economics, Edward Elgar Publishing, vol. 3(3), pages 392-418, July.
    7. Bouakez, Hafedh, 2005. "Nominal rigidity, desired markup variations, and real exchange rate persistence," Journal of International Economics, Elsevier, vol. 66(1), pages 49-74, May.
    8. Wu, Jyh-Lin & Chen, Pei-Fen, 2008. "A revisit on dissecting the PPP puzzle: Evidence from a nonlinear approach," Economic Modelling, Elsevier, vol. 25(4), pages 684-695, July.
    9. Mahbub Morshed, A.K.M. & Turnovsky, Stephen J., 2011. "Real exchange rate dynamics: The role of elastic labor supply," Journal of International Money and Finance, Elsevier, vol. 30(7), pages 1303-1322.
    10. Souki, Kaouthar & Enders, Walter, 2008. "Assessing the importance of global shocks versus country-specific shocks," Journal of International Money and Finance, Elsevier, vol. 27(8), pages 1420-1429, December.

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