Monetary Shocks and Real Exchange Rate Dynamics: a Reappraisal

Jean-Olivier Hairault () and Thepthida Sopraseuth ()

Review of International Economics, 2005, vol. 13, issue 3, pages 576-596

Abstract: This paper proposes a two-country general-equilibrium model incorporating a tradable sector with pricing-to-market as well as a nontradable sector. In that case, real exchange rate fluctuations arise from two sources: changes in the relative price of traded goods, that exemplify deviations from the law of one price, and movements in the relative price of traded to nontraded goods across countries. Our framework sheds light on the propagation mechanisms through which monetary shocks affect the real exchange rate. More specifically, the two components respond in opposite directions to monetary disturbances, which is consistent with data. Besides, the introduction of nontraded goods does not alter the predictive power of monetary shocks because the presence of nontraded goods magnifies the response of the deviation from the law of one price. Copyright Blackwell Publishing Ltd 2005..

Date: 2005
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