Real Exchange Rate Dynamics in the New-Keynesian Model

Kamalyan, Hayk (2021): Real Exchange Rate Dynamics in the New-Keynesian Model.

Abstract

This paper studies the real exchange rate adjustment process in the baseline small open economy New-Keynesian framework. The paper shows that i)the version of the model with real shocks replicates the persistence and the hump-shaped dynamics of the real exchange rate observed in data 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.

• Item Type: MPRA Paper
• Language: English
• Keywords: Real exchange rate adjustment, Nominal-real exchange rate co-movement, New Keynesian model, Monetary policy rule
• Subjects: E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies; F - International Economics > F3 - International Finance > F31 - Foreign Exchange; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics

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