Can Sticky Price Models Generate Volatile and Persistent Real Exchange Rates? / V.V. Chari, Patrick J. Kehoe, Ellen R. McGrattan.

Format:

Book

Author/Creator:

Chari, V.V.

Contributor:

National Bureau of Economic Research.

Kehoe, Patrick J.

McGrattan, Ellen R.

Series:

Working Paper Series (National Bureau of Economic Research) no. w7869.

NBER working paper series no. w7869

Language:

English

Subjects (All):

Business cycles--Econometric models.

Business cycles.

Foreign exchange rates--Econometric models.

Foreign exchange rates.

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2000.

Cambridge : National Bureau of Economic Research, 2000.

Summary:

The central puzzle in international business cycles is that real exchange rates are volatile and persistent. The most popular story for real exchange rate fluctuations is that they are generated by monetary shocks interacting with sticky goods prices. We quantify this story and find that it can account for some of the observed properties of real exchange rates. When prices are held fixed for at least one year, risk aversion is high and preferences are separable in leisure, the model generates real exchange rates that are as volatile as in the data. The model also generates real exchange rates that are persistent, but less so than in the data. If monetary shocks are correlated across countries, then the comovements in aggregates across countries are broadly consistent with those in the data. Making asset markets incomplete or introducing sticky wages does not measurably change the results.

Notes:

Print version record

September 2000.