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Steinsson, Jón. 2008. "The Dynamic Behavior of the Real Exchange Rate in Sticky Price Models."
,
98(1): 519-33.
Show Article Details
DOI: 10.1257/aer.98.1.519
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)
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Authors:
Steinsson, Jón (Columbia U)
JEL Classifications:
E31: Price Level; Inflation; Deflation
E32: Business Fluctuations; Cycles
F31: Foreign Exchange
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