Real Exchange Rate Dynamics in the Presence of Nontraded Goods and Transaction Costs

Inkoo Lee and Jonghyup Shin

Finance Working Papers from East Asian Bureau of Economic Research

Abstract: This paper studies the role of nontraded goods and transaction costs in accounting for the puzzling behavior of the real exchange rate. In particular, we develop a simple general equilibrium model and evaluate the quantitative performance of the model in replicating the dynamic properties of the real exchange rate. The simulation results show that introducing both the transaction costs and nontraded goods in an otherwise standard model dramatically improve its ability to rationalize observed real exchange rate dynamic properties. The benchmark model matches 95% of the persistence and 90% of the volatility of the real exchange rate. In addition, the sensitivity analysis shows that our model can rationalize more than 97% of both persistence and volatility of the real exchange rate. Our analysis suggests that the purchasing price parity puzzle can naturally arise in the presence of transaction costs and nontraded goods, even under the assumption of a flexible price market.

Keywords: Real exchange rate; persistence; Volatility; nontraded goods; Transaction costs (search for similar items in EconPapers)
JEL-codes: F31 F41 F47 (search for similar items in EconPapers)
Date: 2008-10
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.eaber.org/node/21964 (application/pdf)
Our link check indicates that this URL is bad, the error code is: 301 [REDIRECT LOOP] Moved Permanently (http://www.eaber.org/node/21964 [301 Moved Permanently]--> https://www.eaber.org/node/21964 [301 Moved Permanently]--> https://www.eaber.org/node/21964 [301 Moved Permanently]--> https://www.eaber.org/node/21964 [301 Moved Permanently]--> https://www.eaber.org/node/21964 [301 Moved Permanently]--> https://www.eaber.org/node/21964 [301 Moved Permanently]--> https://www.eaber.org/node/21964 [301 Moved Permanently]--> https://www.eaber.org/node/21964)

Related works:
Journal Article: Real exchange rate dynamics in the presence of non-traded goods and transaction costs (2010)
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:eab:financ:21964

Access Statistics for this paper

More papers in Finance Working Papers from East Asian Bureau of Economic Research Contact information at EDIRC.
Bibliographic data for series maintained by Shiro Armstrong ().