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Euro-dollar real exchange rate dynamics in an estimated two-country model: An assessment

Pau Rabanal () and Vicente Tuesta ()

Journal of Economic Dynamics and Control, 2010, vol. 34, issue 4, 780-797

Abstract: Several theoretical contributions using two-country models have combined alternative forms of pricing under nominal rigidities with different asset market structures to explain real exchange rate dynamics. We estimate a two-country model using data for the United States and the Euro Area, and study the importance of such alternative assumptions in fitting the data. A model with local currency pricing and incomplete markets does a good job in explaining real exchange rate volatility, and fits the dynamics of domestic variables well. The complete markets assumption delivers a similar fit only when the structure of shocks is rich enough.

Keywords: Real; exchange; rates; Bayesian; estimation; Model; comparison (search for similar items in EconPapers)
Date: 2010
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Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok

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