Can sticky price models generate volatile and persistent real exchange rates?

Varadarajan Chari, Patrick Kehoe and Ellen McGrattan

No 223, Staff Report from Federal Reserve Bank of Minneapolis

Abstract: The conventional wisdom is that monetary shocks interact with sticky goods prices to generate the observed volatility and persistence in real exchange rates. We investigate this conventional wisdom in a quantitative model with sticky prices. We find that with preferences as in the real business cycle literature, irrespective of the length of price stickiness, the model necessarily produces only a fraction of the volatility in exchange rates seen in the data. With preferences which are separable in leisure, the model can produce the observed volatility in exchange rates. We also show that long stickiness is necessary to generate the observed persistence. In addition, we show that making asset markets incomplete does not measurably increase either the volatility or persistence of real exchange rates. ; Replaced by Staff Report 277

Keywords: Foreign exchange rates; Econometric models; Prices (search for similar items in EconPapers)
Date: 1998
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Citations: View citations in EconPapers (103)

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Related works:
Journal Article: Can Sticky Price Models Generate Volatile and Persistent Real Exchange Rates? (2002)
Working Paper: Can sticky price models generate volatile and persistent real exchange rates? (2002)
Working Paper: Can Sticky Price Models Generate Volatile and Persistent Real Exchange Rates? (2000)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedmsr:223

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