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.

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.

• 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

References

Bergin, Paul and Robert Feenstra. 2001. ``Pricing-to-market, staggered contracts, and real exchange rate persistence'', Journal of International Economics, Elsevier, Volume 54(2), pp. 333-359,

Benigno, Gianluca. 2004. ``Real exchange rate persistence and monetary policy rules'', Journal of Monetary Economics, Volume 51, Issue 3, pp. 473-502,

Burstein, Ariel and Gita Gopinath. 2014. ``International Prices and Exchange Rates'', Handbook of International Economics, in: Gopinath, G. & Helpman, . & Rogoff, K. (ed.), Handbook of International Economics, Edition 1, Volume 4, pp. 391-451,

Bouakez, Hafedh. 2005. ``Nominal rigidity, desired markup variations, and real exchange rate persistence'', Journal of International Economics, Volume 66, Issue 1, pp. 49-74,

Carvalho, Carlos and Fernanda Nechio. 2015. ``Monetary policy and real exchange rate dynamics in sticky-price models'', Federal Reserve Bank of San Francisco Working Paper 2014–17,

Clarida, Richard and Daniel Waldman. 2008. ``Is Bad News About Inflation Good News for the Exchange Rate? And, If So, Can That Tell Us Anything about the Conduct of Monetary Policy?'', NBER Chapters, in: Asset Prices and Monetary Policy, pp. 371-396,

Cheung, Yin-Wong Cheung and Kon S. Lai. 2000. ``On the purchasing power parity puzzle'', Journal of International Economics, Volume 52, Issue 2, pp. 321-330,

Chari, Varadarajan, Patrick Kehoe and Ellen McGrattan. 2002. ``Can Sticky Price Models Generate Volatile and Persistent Real Exchange Rates?'', Review of Economic Studies, Volume 69, Issue 3, pp. 533-563,

Eichenbaum, Martin and Charles Evans. 1995. ``Some Empirical Evidence on the Effects of Shocks to Monetary Policy on Exchange Rates'', The Quarterly Journal of Economics, Volume 110, Issue 4, pp. 975-1009,

Engel, Charles. 2019. ``Real exchange rate convergence: The roles of price stickiness and monetary policy'', Journal of Monetary Economics, Elsevier, Volume 103(C), pp 21-32,

Finn, G. Mary. 1999. ``An Equilibrium Theory of Nominal and Real Exchange Rate Comovement'', Journal of Monetary Economics, Volume 44, Issue 3, pp. 453-475,

Gali, Jordi and Tommaso Monacelli. 2005. ``Monetary policy and exchange rate volatility in a small open economy'', Review of Economic Studies, Volume 72, Issue 3, pp. 707-734,

Groen,Jan and Akito Matsumoto. 2004. ``Real exchange rate persistence and systematic monetary policy behaviour'', Bank of England working papers 231, Bank of England,

Huizinga, John. 1987. ``An empirical investigation of the long-run behavior of real exchange rates'', Carnegie-Rochester Conference Series on Public Policy, Volume 27, Issue 1, pp. 149-214,

Iversen, Jens and Ulf Söderström. 2014. ``The Dynamic Behavior of the Real Exchange Rate in Sticky Price Models: Comment'', The American Economic Review, Volume 104, No. 3, pp. 1072-1089,

Mussa, Michael. 1986. ``Nominal Exchange Rate regimes and the Behavior of Real Exchange Rates: Evidence and Implications'', Carnegie-Rochester Conference Series on Public Policy, Volume 25, pp. 117-214,

Monacelli, Tommaso . 2004. ``Into the Mussa Puzzle: Monetary Policy Regimes and the Real Exchange Rate in a Small Open Economy'', Journal of International Economics, Volume 62, Issue 1, pp. 191-217.