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
(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