EconPapers    
Economics at your fingertips  
 

The Lucas critique and the stability of empirical models

Thomas Lubik () and Paolo Surico ()

No 06-05, Working Paper from Federal Reserve Bank of Richmond

Abstract: Empirical evidence suggests that movements in international relative prices (such as the real exchange rate) are large and persistent. Nontraded goods, both in the form of final consumption goods and as an input into the production of final tradable goods, are an important aspect behind international relative price movements. In this paper we show that nontraded goods have important implications for exchange rate behavior, even though fluctuations in the relative price of nontraded goods account for a relatively small fraction of real exchange rate movements. In our quantitative study nontraded goods magnify the volatility of exchange rates when compared to the model without nontraded goods. Cross-country correlations and the correlation of exchange rates with other macro variables are closer in line with the data. In addition, contrary to a large literature,standard alternative assumptions about the currency in which firms price their goods are virtually inconsequential for the properties of aggregate variables in our model, other than the terms of trade.

Keywords: Monetary policy; Econometric models (search for similar items in EconPapers)
Date: 2006
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7) Track citations by RSS feed

Downloads: (external link)
http://www.richmondfed.org/publications/research/working_papers/2006/wp_06-5.cfm (text/html)
http://www.richmondfed.org/publications/research/w ... /2006/pdf/wp06-5.pdf (application/pdf)

Related works:
Journal Article: The Lucas critique and the stability of empirical models (2010) Downloads
Journal Article: The Lucas critique and the stability of empirical models (2010) Downloads
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:fedrwp:06-05

Ordering information: This working paper can be ordered from

Access Statistics for this paper

More papers in Working Paper from Federal Reserve Bank of Richmond Contact information at EDIRC.
Bibliographic data for series maintained by ().

 
Page updated 2021-04-08
Handle: RePEc:fip:fedrwp:06-05