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Exchange Rates and Endogenous Productivity

Nils Gornemann (), Pablo Guerron and Felipe Saffie ()

No 1301, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: Real exchange rates (RERs) display sizable uctuations not only over the business cycle, but also at lower frequencies, resulting in large and persistent swings over decades|facts that many business cycle models struggle to match. We propose an international macroeconomics model with endogenous productivity to rationalize these facts. In the model, endogenous growth amplifies stationary uctuations generating persistent productivity differences between countries that trigger low-frequency cycles in the RER. The estimated model effortlessly replicates the empirical spectrum, autocorrelation, and half-life of the RER. In addition, we document that low frequency movements in aggregate trade ows are crucial to discipline the RER cycles. Finally, we validate the model-implied co-movement between relative prices and technology differentials using a panel of cross industry-country data on patent and industry prices.

Keywords: Real exchange rate; Endogenous growth; RBC (search for similar items in EconPapers)
JEL-codes: F31 F41 F43 F44 (search for similar items in EconPapers)
Date: 2020-09-18
New Economics Papers: this item is included in nep-dge, nep-int and nep-opm
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgif:1301

DOI: 10.17016/IFDP.2020.1301

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