Real Exchange Rate Persistence and Monetary Policy Rules

Benigno, Gianluca

doi:10.2139/ssrn.251191

Cited by 62 publications

(145 citation statements)

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“…4 With goods prices that are largely rigid at a point in time, monetary shocks, which cause jumps in the nominal exchange rate, imply comparable jumps in the real exchange rate. However, in these models, PPP deviations tend to dampen at a rate that is rigidly tied to the degree of price stickiness.…”

Section: Introductionmentioning

confidence: 99%

“…7 Thus, reliance on REH forces economists to seek explanations of the PPP puzzle by altering speci…cations of the non-expectational components of their models. 8 In a recent attempt to resolve the PPP puzzle in a sticky-price REH model, Benigno (2004) shows that the adjustments of the real exchange rate and goods prices can be delinked by endogenizing monetary policy. 9 In his calibration exercises, Benigno assumes a reasonable degree of price stickiness, but he also makes several special assumptions.…”

Section: Introductionmentioning

confidence: 99%

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A Resolution of the Purchasing Power Parity Puzzle: Imperfect Knowledge and Long Swings

et al. 2008

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Asset prices undergo long swings that revolve around benchmark levels. In currency markets, ‡uctuations involve real exchange rates that are highly persistent and that move in nearparallel fashion with nominal rates. The inability to explain these two regularities with one model has been called the "purchasing power parity puzzle." In this paper, we trace the puzzle to exchange rate modelers'use of the "Rational Expectations Hypothesis." We show that once imperfect knowledge is recognized, a monetary model is able to account for the puzzle, as well as other salient features of the data, including the long-swings behavior of exchange rates.

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Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

A Resolution of the Purchasing Power Parity Puzzle: Imperfect Knowledge and Long Swings

et al. 2008

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“…We set the signi…cance level of the linearity test at 5 percent; rejections of the null hypothesis in (8) indicate the presence of nonlinear dynamics that may be captured as ESTAR/LSTAR type processes. Our goal here is to determine the number of times that nonlinearity is detected, and, conditional on this detection, to compute the number of times that an ESTAR/LSTAR speci…cation is chosen.…”

Section: Results Of Nonlinearity Testsmentioning

confidence: 99%

Causes of nonlinearities in low-order models of the real exchange rate

Ahmad

Mykhaylova

2013

Journal of International Economics

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This paper investigates the extent to which modern DSGE models, which feature local currency pricing, home bias, nontraded goods and incomplete markets, can generate nonlinear real exchange rate dynamics that are consistent with those found in the time series literature using data from the current ‡oating period. Our key …ndings are as follows. First, if the solution to the DSGE model is approximated to the …rst order, then linearity tests that utilize univariate autoregressions of the real exchange rate su¤er from an omitted variables problem, which leads them to overestimate the true incidence of nonlinearity. Consequently, studies that fail to control for this problem may spuriously …nd evidence of nonlinearities in the data, despite the fact that the data generating process may be linear. Second, we propose a strategy that can largely eliminate this distortion. Finally, we …nd that DSGE models solved using higher order approximations are capable of generating true structural nonlinearities in real exchange rates both asymptotically and in short samples.JEL Classi…cation: C15 C32 F41 F47

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“…We pick to match the volatility of the real exchange rate relative to output in the model with the data. 7 The steady state capital output ratio is a function of the technological parameters as well as…”

Section: C(s T ) + X(s T ) = Y(s T )mentioning

confidence: 99%

“…processes and designs, including incentive and compensation systems-that enable some …rms to consistently extract out of a given level of resources a higher level of product and at lower cost than other …rms." 5 4 An alternative approach to generating persisitent real exchange rate movements in response to monetary shocks is formalized in Benigno (2004). He shows that one can get persistent real exchange rate movements even with relatively low nominal rigidity if monetary policy is conducted in a smooth or "inertial" way.…”

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confidence: 99%

Persistent real exchange rates

Johri

Lahiri

2008

Journal of International Economics

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1 We would like to thank without implicating two anonymous referees, the editor Eric van Wincoop, Paul AbstractThree features of the international exchange rate data that are widely known are: (a) a high correlation between bilateral nominal and real exchange rates; (b) real exchange rate movements are highly persistent; and (c) real exchange rates are highly volatile. This paper attempts a joint, albeit partial, rationalization of these facts in an environment with no staggered contracts and where prices are preset for only one quarter. There are two key innovations in the paper. First, we augment a standard two-country open economy model with learning-by-doing in production at the …rm level. This induces monopolistically competitive …rms to endogeneize the productivity e¤ect of their price setting behavior. Speci…cally, …rms endogenously choose not to adjust prices by the full proportion of a positive monetary shock in order to take advantage of the productivity bene…ts of higher production. Second, we introduce habits in leisure. This makes the labor supply decision dynamic and adds an additonal source of propagation. We show that the calibrated model can quantitatively reproduce signi…cant fractions of the aforementioned facts. Moreover, as in the data, the model also produces a positive correlation between the terms of trade and the nominal exchange rate.

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Real Exchange Rate Persistence and Monetary Policy Rules

Cited by 62 publications

References 43 publications

A Resolution of the Purchasing Power Parity Puzzle: Imperfect Knowledge and Long Swings

A Resolution of the Purchasing Power Parity Puzzle: Imperfect Knowledge and Long Swings

Causes of nonlinearities in low-order models of the real exchange rate

Persistent real exchange rates

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