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Volatile and persistent real exchange rates without the contrivance of sticky prices

Listed author(s):
  • Roche, M.J.

    ()

    (Department of Economics, National University of Ireland, Maynooth, Ireland.)

  • Moore. M.J.

    ()

    (Queen’s University Belfast, Northern Ireland)

The flexible-price two-country monetary model is extended to include a consumption externality with habit persistence. The model is simulated using the artificial economy methodology. It successfully explains (i) the high volatility of nominal and real exchange rates, (ii) the high correlation between real and nominal rates, and (iii) the persistence of real exchange rates. It offers a neo-classical explanation for the Meese-Rogoff exchange rate forecasting puzzle.

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File URL: http://repec.maynoothuniversity.ie/mayecw-files/N1160402.pdf
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Paper provided by Department of Economics, Finance and Accounting, National University of Ireland - Maynooth in its series Economics, Finance and Accounting Department Working Paper Series with number n1160402.

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Date of creation: Apr 2002
Handle: RePEc:may:mayecw:n1160402
Contact details of provider: Postal:
Maynooth, Co. Kildare

Phone: 353-1-7083728
Fax: 353-1-7083934
Web page: http://www.maynoothuniversity.ie/economics-finance-and-accounting

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