American Economic Review: Vol. 98 No. 1 (March 2008)

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The Dynamic Behavior of the Real Exchange Rate in Sticky Price Models

Article 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.98.1.519

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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