Endogenous Rigidities and Real Exchange Rates

Margarida Duarte and Michael Dotsey

No 804, 2004 Meeting Papers from Society for Economic Dynamics

Abstract: A central feature of international business cycles is that fluctuations of real and nominal exchange rates are volatile and persistent. Recent two-country dynamic general equilibrium models have explored the implications for real exchange rate fluctuations from monetary shocks in the presence of nominal rigidities. Without substantial price-stickiness, these models cannot match the persistence of real exchange rates. Our paper builds a two-country model with nominal rigidities and incomplete asset markets. Deviations from purchasing power parity arise from the need to use local labor in order to make imported goods available for consumption and production. We consider an alternative view of real marginal cost, which comprises (local and imported) produced inputs and variable utilization of the capital stock. These features reduce the elasticity of marginal cost with respect to output, thus reducing the extent of price adjustments by firms in response to a monetary shock, and generate responses of output and consumption to shifts in monetary policy that persist beyond the period of (exogenously imposed) price stickiness. Finally, we consider general demand aggregators (allowing for kinked demand functions). We explore the (quantitative) properties of our model for the volatility and persistence of nominal and real exchange rates

Keywords: Endogenous Rigidities; Persistence; Real Exchange Rate (search for similar items in EconPapers)
JEL-codes: F41 (search for similar items in EconPapers)
Date: 2004
References: Add references at CitEc
Citations:

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
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:red:sed004:804

Access Statistics for this paper

More papers in 2004 Meeting Papers from Society for Economic Dynamics Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA. Contact information at EDIRC.
Bibliographic data for series maintained by Christian Zimmermann ().