Model Trending Real Exchange Rates
The multilateral real exchange rates of major industrial countries often contain deterministic time trends. This note develops a simple stochastic model of a small open economy with a deterministically trending real exchange rate. Real exchange rate trends are caused by differential productivity growth in tradables and nontradables. Although the model assumes complete price flexibility, it can produce a correlation between the real exchange rate and the international real interest-rate differential similar to the one that arises in sticky-price overshooting models dominated by monetary shocks.
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References listed on IDEAS
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- Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-1176, December.
- Menzie Chinn and Jeffrey Frankel., 1993.
"Patterns in Exchange Rate Forecasts for 25 Currencies,"
Center for International and Development Economics Research (CIDER) Working Papers
C93-009, University of California at Berkeley.
- Chinn, Menzie & Frankel, Jeffrey, 1993. "Patterns in Exchange Rate Forecasts for 25 Currencies," Center for International and Development Economics Research (CIDER) Working Papers 233182, University of California-Berkeley, Department of Economics.
- Menzie Chinn & Jeffrey Frankel, 1991. "Patterns in Exchange Rate Forecasts for 25 Currencies," NBER Working Papers 3807, National Bureau of Economic Research, Inc.
- Robert Summers & Alan Heston, 1991. "The Penn World Table (Mark 5): An Expanded Set of International Comparisons, 1950–1988," The Quarterly Journal of Economics, Oxford University Press, vol. 106(2), pages 327-368.
- Bergstrand, Jeffrey H, 1991. "Structural Determinants of Real Exchange Rates and National Price Levels: Some Empirical Evidence," American Economic Review, American Economic Association, vol. 81(1), pages 325-334, March.
- Hsieh, David A., 1982. "The determination of the real exchange rate : The productivity approach," Journal of International Economics, Elsevier, vol. 12(3-4), pages 355-362, May.
- Bela Balassa, 1964. "The Purchasing-Power Parity Doctrine: A Reappraisal," Journal of Political Economy, University of Chicago Press, vol. 72, pages 584-584.
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