American Economic Review
ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)
The Dynamic Behavior of the Real Exchange Rate in Sticky Price Models
American Economic Review
vol. 98,
no. 1, March 2008
(pp. 519–33)
Abstract
Existing empirical evidence suggests that real exchange rates exhibit hump-shaped dynamics. I show that this is a robust fact across nine large, developed economies. This fact can help explain why sticky price business cycle models have been unable to match the persistence of the real exchange rate. I show that, in response to a number of different real shocks, a two-country sticky price business cycle model yields hump-shaped dynamics for the real exchange rate. The hump-shaped dynamics generated by the model are a powerful source of endogenous persistence that allows the model to match the long half-life of the real exchange rate. (JEL F31)Citation
Steinsson, Jón. 2008. "The Dynamic Behavior of the Real Exchange Rate in Sticky Price Models." American Economic Review, 98 (1): 519–33. DOI: 10.1257/aer.98.1.519Additional Materials
JEL Classification
- E31 Price Level; Inflation; Deflation
- E32 Business Fluctuations; Cycles
- F31 Foreign Exchange