Monetary Policy and Real Exchange Rate Dynamics in Sticky-Price Models

Carlos Carvalho, Fernanda Nechio and Fang Yao ()

No 2014-17, Working Paper Series from Federal Reserve Bank of San Francisco

Abstract: We study how real exchange rate dynamics are affected by monetary policy in dynamic, stochastic, general equilibrium, sticky-price models. Our analytical and quantitative results show that the source of interest rate persistence ? policy inertia or persistent policy shocks ? is key. When the monetary policy rule has a strong interest rate smoothing component, these models fail to generate high real exchange rate persistence in response to monetary shocks, as policy inertia hampers their ability to generate a hump-shaped response to such shocks. Moreover, in the presence of persistent monetary shocks, increasing policy inertia may decrease real exchange rate persistence.

Keywords: real exchange rates; monetary policy; interest rate smoothing; PPP puzzle; persistence (search for similar items in EconPapers)
JEL-codes: E0 F3 F41 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2014-07
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon and nep-opm
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Citations: View citations in EconPapers (2)

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Working Paper: Monetary Policy and Real Exchange Rate Dynamics in Sticky-Price Models (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedfwp:2014-17

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DOI: 10.24148/wp2014-17

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