Real exchange rate volatility and disconnect: an empirical investigation

Riccardo Cristadoro (), Andrea Gerali (), Stefano Neri () and Massimiliano Pisani ()
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Andrea Gerali: Bank of Italy, Economic Outlook and Monetary Policy Research Department
Stefano Neri: Bank of Italy, Economic Outlook and Monetary Policy Research Department
Massimiliano Pisani: Bank of Italy, Economic Outlook and Monetary Policy Research Department

No 660, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research Department

Abstract: A two-country model that incorporates many features proposed in the New Open Economy Macroeconomics literature is developed in order to replicate the volatility of the real exchange rate and its disconnect with macroeconomic variables. The model is estimated using data for the euro area and the U.S. and Bayesian methods. The analysis delivers the following results: (a) international price discrimination, home bias and shocks to the uncovered interest rate parity (UIRP) condition are key features to replicate the variance of the real exchange rate; (b) home bias, shocks to the UIRP condition and to production technologies help replicating the disconnect;(c) distribution services intensive in local nontradeables are an important source of international price discrimination.

Keywords: International business cycle; Exchange rate volatility; Exchange rate pass-through; International transmission. (search for similar items in EconPapers)
JEL-codes: F32 F33 F41 C11 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-fmk, nep-ifn and nep-opm
Date: Written 2008-04
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