Why Is the Business-Cycle Behavior of Fundamentals Alike Across Exchange-Rate Regimes?
Luca Dedola () and
Sylvain Leduc ()
Working Papers from Oesterreichische Nationalbank (Austrian Central Bank)
Since the adoption of flexible exchange rates, real exchange rates have been much more volatile than they were under Bretton Woods. However, the volatilities of most other macroeconomic variables have remained approximately unchanged. This poses a puzzle for standard international business cycle models. This paper develops a two-country, two-sector model with nominal rigidities featuring deviations from the law of one price due to firms setting prices in buyersÂ’ currencies. By partially insulating goods markets across countries and thus mitigating the international expenditure-switching effect, this pricing behavior is found to considerably dampen the responses of quantities to shocks hitting the economies therefore helping to account for the puzzle.
JEL-codes: E32 E52 F31 F33 F41 (search for similar items in EconPapers)
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Journal Article: Why Is the Business-Cycle Behaviour of Fundamentals Alike across Exchange-Rate Regimes? (2001)
Working Paper: Why is the Business-Cycle Behavior of Fundamentals Alike Across Exchange-Rate Regimes? (2001)
Working Paper: Why Is the Business Cycle Behavior of Fundamentals Alike Across Exchange Rate Regimes? (2000)
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