Real Exchange Rate Dynamics Beyond Business Cycles

Dan Cao, Martin Evans and Wenlan Lua

MPRA Paper from University Library of Munich, Germany

Abstract: We examine how medium-term movements in real exchange rates and GDP vary with international financial conditions. For this purpose, we study the international transmission of productivity shocks across a variety of IRBC models that incorporate different assumptions about the persistence of productivity shocks, the degree of international risk sharing and access to international asset markets. Using a new global solution method, we demonstrate that the transmission of productivity shocks depends critically on the proximity of a national economy to its international borrowing limit. We then show that this implication of the IRBC model is consistent with the behavior of the US-UK real exchange rate and GDP over the past 200 years. The model also produces a negative correlation between relative consumption growth and real depreciation rate consistent with more recent data, and hence offers a resolution of the Backus-Smith puzzle.

Keywords: Real Exchange Rates; International Real Business Cycles; Global Solution Methods (search for similar items in EconPapers)
JEL-codes: C60 F30 F31 F41 F44 G11 (search for similar items in EconPapers)
Date: 2020-03-10, Revised 2020-03-10
New Economics Papers: this item is included in nep-dge, nep-ifn and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:99054

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