The real exchange rate in sticky price models: does investment matter?

Enrique Martínez García () and Jens Sondergaard

No 17, Globalization Institute Working Papers from Federal Reserve Bank of Dallas

Abstract: This paper re-examines the ability of sticky-price models to generate volatile and persistent real exchange rates. We use a DSGE framework with pricing-to-market akin to those in Chari, et al. (2002) and Steinsson (2008) to illustrate the link between real exchange rate dynamics and what the model assumes about physical capital. We show that adding capital accumulation to the model facilitates consumption smoothing and significantly impedes the model's ability to generate volatile real exchange rates. Our analysis, therefore, caveats the results in Steinsson (2008) who shows how real shocks in a sticky-price model without capital can replicate the observed real exchange rate dynamics. Finally, we find that the CKM (2002) persistence anomaly remains robust to several alternative capital specifications including set-ups with variable capital utilization and investment adjustment costs (see, e.g., Christiano, et al., 2005). In summary, the PPP puzzle is still very much alive and well.

JEL-codes: F31 F37 F41 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2008
New Economics Papers: this item is included in nep-cba, nep-dge, nep-ifn, nep-mac and nep-opm
Note: Published as: Martinez-Garcia, Enrique and Jens Søndergaard (2013), "Investment and Real Exchange in Sticky Price Models," Macroeconomic Dynamics17 (2): 195-234.
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Downloads: (external link)
https://www.dallasfed.org/-/media/documents/resear ... papers/2008/0017.pdf Full Text (text/html)

Related works:
Journal Article: INVESTMENT AND REAL EXCHANGE RATES IN STICKY PRICE MODELS (2013)
Working Paper: The real exchange rate in sticky-price models: does investment matter? (2009)
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:fip:feddgw:17

Access Statistics for this paper

More papers in Globalization Institute Working Papers from Federal Reserve Bank of Dallas Contact information at EDIRC.
Bibliographic data for series maintained by Amy Chapman ().