Can International Macroeconomic Models Explain Low-Frequency Movements of Real Exchange Rates?

Pau Rabanal and Juan F Rubio-Ramirez

No 2015-04, Working Papers from FEDEA

Abstract: Real exchange rates exhibit important low-frequency fluctuations. This makes the analysis of real exchange rates at all frequencies a more sound exercise than the typical business cycle one, which compares actual and simulated data after the Hodrick- Prescott Ölter is applied to both. A simple two-country, two-good, international real business cycle model can explain the volatility of the real exchange rate when all frequencies are studied. The puzzle is that the model generates too much persistence of the real exchange rate instead of too little, as the business cycle analysis asserts. We show that the introduction of input adjustment costs in production, cointegrated productivity shocks across countries, and lower home bias allows us to reconcile theory and this feature of the data.

Date: 2015-03
New Economics Papers: this item is included in nep-dge, nep-mac and nep-opm
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Citations: View citations in EconPapers (22)

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Related works:
Journal Article: Can international macroeconomic models explain low-frequency movements of real exchange rates? (2015)
Working Paper: Can international macroeconomic models explain low-frequency movements of real exchange rates? (2015)
Working Paper: Can International Macroeconomic Models Explain Low-Frequency Movements of Real Exchange Rates? (2012)
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