Real exchange rate dynamics in the New-Keynesian model

Hayk Kamalyan

International Economics, 2023, vol. 174, issue C, 250-255

Abstract: This paper studies the real exchange rate adjustment process in the baseline small open economy New-Keynesian framework. The paper shows that i) the version of the model with real shocks replicates the persistence and the hump-shaped dynamics of the real exchange rate observed in the data, and ii) the model cannot simultaneously match the observed dynamics of the real exchange rate and the close co-movement between the real and nominal currency returns. Thus, the baseline framework cannot fully capture the real exchange rate adjustment process.

Keywords: Real exchange rate adjustment; Nominal-real exchange rate co-movement; New keynesian model; Monetary policy rule (search for similar items in EconPapers)
JEL-codes: E52 E58 F31 F41 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:inteco:v:174:y:2023:i:c:p:250-255

DOI: 10.1016/j.inteco.2023.04.004

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