Real exchange rate dynamics revisited: a case with financial market imperfections

Ippei Fujiwara and Yuki Teranishi

No 62, Globalization Institute Working Papers from Federal Reserve Bank of Dallas

Abstract: In this paper, we investigate the relationship between real exchange rate dynamics and financial market imperfections. For this purpose, we first construct a New Open Economy Macroeconomics (NOEM) model that incorporates staggered loan contracts as a simple form of the financial market imperfections. Our model with such a financial market friction replicates persistent, volatile, and realistic hump-shaped responses of real exchange rates, which have been thought very difficult to materialize in standard NOEM models. Remarkably, these realistic responses can materialize even with both supply and demand shocks, such as cost-push, loan rate and monetary policy shocks. This implies that the financial market developments is a key element for understanding real exchange rate dynamics.

JEL-codes: F31 F41 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2010
New Economics Papers: this item is included in nep-cba, nep-mac and nep-opm
Note: Published as: Fujiwara, Ippei and Yuki Teranishi (2011), "Real Exchange Rate Dynamics Revisited: A Case with Financial Market Imperfections," Journal of International Money and Finance 30 (7): 1562-1589.
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Citations: View citations in EconPapers (8)

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Journal Article: Real exchange rate dynamics revisited: A case with financial market imperfections (2011)
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