Monetary Shocks and Real Exchange Rates in Sticky Price Models of International Business Cycles / 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. w5876.

NBER working paper series no. w5876

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1997.

Summary:

The data show large and persistent deviations of real exchange rates from purchasing power parity. Recent work has shown that to a large extent these movements are driven by deviations from the law of one price for traded goods. In the data, real and nominal exchange rates are about 6 times as volatile as relative price levels and they both are highly persistent, with serial correlations of 0.85 and 0.83, respectively. This paper develops a sticky price model with price discriminating monopolists, which produces deviations from the law of one price for traded goods. Our benchmark model, which has prices set for one quarter at a time and a unit consumption elasticity of money demand, does not come close to reproducing these observations. A model which has producers setting prices for 6 quarters at a time and a consumption elasticity of money demand of 0.27 does much better. In it real and nominal exchange rates are about 3 times as volatile as relative price levels and exchange rates are persistent, with serial correlations of 0.65 and 0.66, respectively.

Notes:

Print version record

January 1997.