Why are business cycles alike across exchange-rate regimes?
Sylvain Leduc () and
Luca Dedola ()
No 02-11, Working Papers from Federal Reserve Bank of Philadelphia
Since the adoption of flexible exchange rates in the early 1970s, real exchange rates have been much more volatile than they were under Bretton Woods. However, the literature showed that the volatilities of most other macroeconomic variables have not been affected by the change in exchange-rate regime. This poses a puzzle for standard international business cycle models. In this paper, the authors study this puzzle by developing a two-country, two-sector model with nominal rigidities featuring deviations from the law of one price because a fraction of firms set prices in buyers' currencies. The authors show that a model with such building blocks can improve the match between the model and the data across exchange-rate regimes. By partially insulating goods markets across countries and thus mitigating the international expenditure-switching effect, local currency pricing considerably dampens the responses of net exports to shocks hitting the economies therefore helping to account for the puzzle.
Keywords: Foreign; exchange; rates (search for similar items in EconPapers)
Date: 2002, Revised 2002
New Economics Papers: this item is included in nep-dge and nep-ifn
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1) Track citations by RSS feed
Downloads: (external link)
http://www.philadelphiafed.org/research-and-data/p ... ers/2002/wp02-11.pdf (application/pdf)
Working Paper: On exchange rate regimes, exchange rate fluctuations, and fundamentals (1999)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:fip:fedpwp:02-11
Ordering information: This working paper can be ordered from
Access Statistics for this paper
More papers in Working Papers from Federal Reserve Bank of Philadelphia Contact information at EDIRC.
Bibliographic data for series maintained by Beth Paul ().