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

Kamalyan, Hayk (2020): The Dynamic Behavior of the Real Exchange Rate in Sticky Price Models: A Reassessment.

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Abstract

In ``The Dynamic Behavior of the Real Exchange Rate in Sticky Price Models'' published in the American Economic Review, Steinsson (2008) argues that a baseline open economy sticky price model with real shocks can rationalize the real exchange rate persistence and hump-shaped dynamics observed in data. The current paper shows that i) the dynamics of the real exchange rate depend upon the parameter values of the Taylor rule, ii) the model cannot simultaneously match the observed dynamics of the real exchange rate and the close co-movement between the real and nominal currency returns. Thus, the baseline framework is not capable of fully capturing the real exchange rate adjustment process.

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