The Dynamic Behavior of the Real Exchange Rate in Sticky Price Models

Jon Steinsson

No 13910, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Existing empirical evidence suggests that real exchange rates exhibit hump-shaped dynamics. I show that this is a robust fact across nine large, developed economies. This fact can help explain why existing sticky-price business cycle models have been unable to match the persistence of the real exchange rate. The recent literature has focused on models driven by monetary shocks. These models yield monotonic impulse responses for the real exchange rate. It is extremely difficult for models that have this feature to match the empirical persistence of the real exchange rate. I show that in response to a number of different real shocks a two-country sticky-price business cycle model yields hump-shaped dynamics for the real exchange rate. The hump-shaped dynamics generated by the model are a powerful source of endogenous persistence that allows the model to match the long half-life of the real exchange rate.

JEL-codes: F31 F41 (search for similar items in EconPapers)
Date: 2008-04
New Economics Papers: this item is included in nep-cba, nep-ifn, nep-mac and nep-opm
Note: IFM ME
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (125)

Published as Jón Steinsson, 2008. "The Dynamic Behavior of the Real Exchange Rate in Sticky Price Models," American Economic Review, American Economic Association, vol. 98(1), pages 519-33, March.

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Related works:
Journal Article: The Dynamic Behavior of the Real Exchange Rate in Sticky Price Models (2008)
Working Paper: The Dynamic Behavior of the Real Exchange Rate in Sticky Price Models (2005)
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