Real Exchange Rate Volatility and Disconnect: An Empirical Investigation
55 Pages Posted: 20 Jun 2008
Date Written: April 30, 2008
A two-country model that incorporates many features proposed in the New Open Economy Macroeconomics literature is developed in order to replicate the volatility of the real exchange rate and its disconnect with macroeconomic variables. The model is estimated using data for the euro area and the U.S. and Bayesian methods. The analysis delivers the following results: (a) international price discrimination, home bias and shocks to the uncovered interest rate parity (UIRP) condition are key features to replicate the variance of the real exchange rate; (b) home bias, shocks to the UIRP condition and to production technologies help replicating the disconnect; (c) distribution services intensive in local nontradeables are an important source of international price discrimination.
Keywords: International business cycle, Exchange rate volatility, Exchange rate pass-through, International transmission
JEL Classification: F32, F33, F41, C11
Suggested Citation: Suggested Citation