Information Frictions and Real Exchange Rate Dynamics

Giacomo Candian

No 9106, EcoMod2016 from EcoMod

Abstract: The paper provides a novel explanation for the observed large and persistent fluctuations in real exchange rate dynamics using a flexible-price model with dispersed information among firms. The paper extend the imperfect common knowledge model developed by Woodford (2002) and Melosi (2014) to a two-country environment. The model is estimated on US and European data using Bayesian methods. The model successfully explain the volatility and persistence of the US/Euro Area real exchange rate, as well as its high correlation with the nominal exchange rate. In line with the empirical evidence, the estimated model delivers hump-shaped dynamics for real exchange rate and highly persistent effect of monetary disturbances. A battery of results shows that the model with information frictions outperforms traditional sticky-price models of real exchange rates.

Keywords: US and the Euro Area; Monetary issues; General equilibrium modeling (CGE) (search for similar items in EconPapers)
Date: 2016-07-04
New Economics Papers: this item is included in nep-dge and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Information frictions and real exchange rate dynamics (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:ekd:009007:9106

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