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

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  • Roche, M.J.

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

  • Moore. M.J.

    () (Queen’s University Belfast, Northern Ireland)

Abstract

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.

Suggested Citation

  • Roche, M.J. & Moore. M.J., 2002. "Volatile and persistent real exchange rates without the contrivance of sticky prices," Economics, Finance and Accounting Department Working Paper Series n1160402, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth.
  • Handle: RePEc:may:mayecw:n1160402
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