Can international macroeconomic models explain low-frequency movements of real exchange rates?

Pau Rabanal and Juan F Rubio-Ramirez

Journal of International Economics, 2015, vol. 96, issue 1, 199-211

Abstract: Real exchange rates exhibit important low-frequency fluctuations. This makes the analysis of real exchange rates at all frequencies a more sound exercise than the typical business cycle one, which compares actual and simulated data after the Hodrick-Prescott filter is applied to both. A simple two-country, two-good, international real business cycle model can explain the volatility of the real exchange rate when all frequencies are studied. The puzzle is that the model generates too much persistence of the real exchange rate instead of too little, as the business cycle analysis asserts. We show that the introduction of input adjustment costs in production, cointegrated productivity shocks across countries, and lower home bias allows us to reconcile theory and this feature of the data.

Keywords: International business cycles; Spectrum; Real exchange rates; Cointegration (search for similar items in EconPapers)
JEL-codes: E32 F32 F33 F41 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (21)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S002219961500029X
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Can international macroeconomic models explain low-frequency movements of real exchange rates? (2015)
Working Paper: Can International Macroeconomic Models Explain Low-Frequency Movements of Real Exchange Rates? (2015)
Working Paper: Can International Macroeconomic Models Explain Low-Frequency Movements of Real Exchange Rates? (2012)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:inecon:v:96:y:2015:i:1:p:199-211

DOI: 10.1016/j.jinteco.2015.01.009

Access Statistics for this article

Journal of International Economics is currently edited by Gourinchas, Pierre-Olivier and Rodríguez-Clare, Andrés

More articles in Journal of International Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().