Information frictions and real exchange rate dynamics

Candian, Giacomo

Information frictions and real exchange rate dynamics

Journal of International Economics, 2019, vol. 116, issue C, 189-205

Abstract: Real exchange rates are highly volatile and persistent. I provide a novel structural explanation for these facts using a model with dispersed information among firms. When producers face strategic complementarities in price-setting, uncertainty about competitors' beliefs results in sluggish price adjustment that can generate large and long-lived real exchange rate movements. I estimate the model using data from the US and Euro Area, and show that it successfully explains the unconditional volatility and persistence of the real exchange rate. The model also accounts for the persistent and hump-shaped real exchange rate behavior conditional on nominal disturbances documented by a structural VAR. About 50% of this persistence is due to the inertial dynamics of higher-order beliefs.

Keywords: Real Exchange Rates; Strategic Complementarities; Dispersed Information; Bayesian Estimation (search for similar items in EconPapers)
JEL-codes: C51 D83 E31 E32 F41 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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Related works:
Working Paper: Information Frictions and Real Exchange Rate Dynamics (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:inecon:v:116:y:2019:i:c:p:189-205

DOI: 10.1016/j.jinteco.2018.11.006

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