Real exchange rate dynamics revisited: A case with financial market imperfections

Ippei Fujiwara and Yuki Teranishi

Journal of International Money and Finance, 2011, vol. 30, issue 7, 1562-1589

Abstract: In this paper, we investigate the relationship between real exchange rate dynamics and financial market imperfections. For this purpose, we first construct a New Open Economy Macroeconomics (NOEM) model that incorporates staggered loan contracts as a simple form of the financial market imperfections. Our model with such a financial market friction replicates persistent, volatile, and realistic hump-shaped responses of real exchange rates, which have been thought very difficult to materialize in standard NOEM models. Remarkably, these realistic responses can materialize even with both supply and demand shocks, such as cost-push, loan rate, and monetary policy shocks. This implies that the financial market development is a key element for understanding real exchange rate dynamics.

Keywords: Financial market imperfection; Real exchange rate; Staggered loan contract (search for similar items in EconPapers)
JEL-codes: F31 F41 (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (7)

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Working Paper: Real exchange rate dynamics revisited: a case with financial market imperfections (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:30:y:2011:i:7:p:1562-1589

DOI: 10.1016/j.jimonfin.2011.06.013

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