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Nominal Rigidity, Desired Markup Variations, and Real Exchange Rate Persistence

Hafedh Bouakez ()

Staff Working Papers from Bank of Canada

Keywords: Exchange rates; Market structure and pricing; Transmission of monetary policy (search for similar items in EconPapers)
JEL-codes: F31 F41 (search for similar items in EconPapers)
Pages: 42 pages Abstract: This paper develops and estimates a dynamic general-equilibrium sticky-price model that accounts for real exchange rate persistence. The key feature of the model is the dependence of the firm's desired markup on its relative price. Desired markup variations exacerbate the nominal rigidity that results from the exogenously imposed frictions in the goods market. The model is estimated by the maximum-likelihood method using Canadian and U.S. data. The estimated model successfully replicates the behaviour of the Canada-U.S. bilateral real exchange rate. In particular, the model closely matches the persistence found in the real exchange rate series. More importantly, this is achieved with a plausible duration of price contracts and a moderate convexity of the demand function.
Date: 2002
New Economics Papers: this item is included in nep-dge and nep-ifn
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Journal Article: Nominal rigidity, desired markup variations, and real exchange rate persistence (2005) Downloads
Working Paper: Nominal Rigidity, Desired Markup Variations, and Real Exchange Rate Persistence (2003)
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