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Exchange rate policy and the role of non-traded goods prices in real exchange rate fluctuations

Exchange rate policy and the role of non-traded goods prices in real exchange rate fluctuations AbstractThis paper uses a DSGE model of two small open economies to explain certain features of real exchange rate cyclical fluctuations in countries with fixed and flexible exchange rates, focusing on the role of traded and non-traded goods prices. In particular, the model illustrates why the relative price of non-traded goods and the relative price between domestic and foreign traded goods are more volatile than the real exchange rate under a fixed exchange rate but not under a flexible exchange rate, why deviations from purchasing power parity for traded goods prices can be more volatile under a fixed exchange rate than under a flexible exchange rate, and why there is no correlation between the volatility of the real exchange rate and its variance decomposition. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The B.E. Journal of Macroeconomics de Gruyter

Exchange rate policy and the role of non-traded goods prices in real exchange rate fluctuations

Azcona, Nestor
The B.E. Journal of Macroeconomics , Volume 17 (2): 1 – Jul 18, 2017
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Publisher
de Gruyter
Copyright
©2017 Walter de Gruyter GmbH, Berlin/Boston
ISSN
1935-1690
eISSN
1935-1690
DOI
10.1515/bejm-2015-0185
Publisher site
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Abstract

AbstractThis paper uses a DSGE model of two small open economies to explain certain features of real exchange rate cyclical fluctuations in countries with fixed and flexible exchange rates, focusing on the role of traded and non-traded goods prices. In particular, the model illustrates why the relative price of non-traded goods and the relative price between domestic and foreign traded goods are more volatile than the real exchange rate under a fixed exchange rate but not under a flexible exchange rate, why deviations from purchasing power parity for traded goods prices can be more volatile under a fixed exchange rate than under a flexible exchange rate, and why there is no correlation between the volatility of the real exchange rate and its variance decomposition.

Journal

The B.E. Journal of Macroeconomics – de Gruyter

Published: Jul 18, 2017

References

  • Habit Persistence, Asset Returns, and the Business Cycle
  • Tastes and Technology in a Two Country Model of the Business Cycle: Explaining International Comovement
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  • Monetary Policy and Long Horizon Uncovered Interest Parity
  • Closing Small Open Economy Models
  • Accounting for U.S. Real Exchange Rate Changes
  • Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy
  • The Importance of Nontradeable Goods’ Prices in Cyclical Real Exchange Rate Fluctuations
  • On the Instability of Variance Decompositions of the Real Exchange Rate across Exchange Rate Regimes : Evidence from Mexico and the United States NBER Working Paper National Bureau of Economic Research
    Mendoza