Cointegrated TFP Processes and International Business Cycles
International Monetary Fund
Juan Francisco Rubio-Ramirez
Duke University - Department of Economics; Federal Reserve Bank of Atlanta - Research Department
Vicente Tuesta Reátegui
Banco Central de Reserva del Peru
September 1, 2009
Federal Reserve Bank of Atlanta Working Paper Series No. 2009-23
A puzzle in international macroeconomics is that observed real exchange rates are highly volatile. Standard international real business cycle (IRBC) models cannot reproduce this fact. We show that total factor productivity processes for the United States and the rest of the world are characterized by a vector error correction model (VECM) and that adding cointegrated technology shocks to the standard IRBC model helps explaining the observed high real exchange rate volatility. Also, we show that the observed increase of the real exchange rate volatility with respect to output in the past twenty years can be explained by changes in the parameter of the VECM.
Number of Pages in PDF File: 44
Keywords: international business cycles, real exchange rates, cointegration
JEL Classification: E32, F32, F33, F41working papers series
Date posted: October 4, 2009
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