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

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  • Kamalyan, Hayk
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.

Suggested Citation

  • Kamalyan, Hayk, 2020. "The Dynamic Behavior of the Real Exchange Rate in Sticky Price Models: A Reassessment," MPRA Paper 107491, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:107491
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    File URL: https://mpra.ub.uni-muenchen.de/108267/1/MPRA_paper_108267.pdf
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    References listed on IDEAS

    as
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    3. Jan J J Groen & Akito Matsumoto, 2004. "Real exchange rate persistence and systematic monetary policy behaviour," Bank of England working papers 231, Bank of England.
    4. Paul R. Bergin & Robert C. Feenstra, 2017. "Pricing-to-Market, Staggered Contracts, and Real Exchange Rate Persistence," World Scientific Book Chapters, in: International Macroeconomic Interdependence, chapter 6, pages 155-185, World Scientific Publishing Co. Pte. Ltd..
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    More about this item

    Keywords

    Real exchange rate adjustment; Nominal-real exchange rate co-movement; New Keynesian model; Monetary policy rule;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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