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Real Frictions and Real Exchange Rate Dynamics: The Roles of Distribution Service and Transaction Cost

Author

Listed:
  • Huh , In

    (Korea Institute for International Economic Policy)

  • Lee , Inkoo

    (Soongsil University)

Abstract

The fact that fluctuations in real exchange rates are highly volatile and persistent has been the central puzzle in international macroeconomics. This paper studies the role of real frictions in accounting for the puzzling behavior of real exchange rates. We show that the introduction of distribution costs and nontradable goods in an otherwise standard competitive model dramatically improves its ability to rationalize observed real exchange rate dynamics. We view our framework as complementary to those that emphasize the role of nominal rigidities.

Suggested Citation

  • Huh , In & Lee , Inkoo, 2012. "Real Frictions and Real Exchange Rate Dynamics: The Roles of Distribution Service and Transaction Cost," Working Papers 12-6, Korea Institute for International Economic Policy.
    • Handle: RePEc:ris:kiepwp:2012_006
    DOI: 10.2139/ssrn.2319721
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    More about this item

    Keywords

    Distribution Costs; Nontradable Goods; Real Exchange Rate;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications

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