Real Exchange Rate Volatility and Disconnect: An Empirical Investigation

55 Pages Posted: 20 Jun 2008

Date Written: April 30, 2008

Abstract

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

Cristadoro, Riccardo and Gerali, Andrea and Neri, Stefano and Pisani, Massimiliano, Real Exchange Rate Volatility and Disconnect: An Empirical Investigation (April 30, 2008). Bank of Italy Temi di Discussione Working Paper No. 660. Available at SSRN: https://ssrn.com/abstract=1148688 or http://dx.doi.org/10.2139/ssrn.1148688

Riccardo Cristadoro (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Servizio Studi
00184 Roma
Italy
+39 06 4792 3341 (Phone)
+39 06 4792 3720 (Fax)

Andrea Gerali

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Stefano Neri

Bank of Italy ( email )

Via Nazionale 91
00184 Roma
Italy
+39 06 4792 2821 (Phone)

Massimiliano Pisani

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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