Volatile and Persistent Real Exchange Rates Without the Contrivance of Sticky Prices

Moore, Michael; Roche, Maurice J.

doi:10.2139/ssrn.307561

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Volatile and Persistent Real Exchange Rates Without the Contrivance of Sticky Prices

WBS Finance Group Research Paper No. 21

29 Pages Posted: 3 May 2002

See all articles by Michael Moore

Michael Moore

University of Warwick - Warwick Business School

Maurice J. Roche

National University of Ireland, Maynooth (NUI Maynooth) - Department of Economics, Finance and Accounting

Abstract

The flexible-price two-country monetary model is extended to include a consumption externality with habit persistence. The model is simulated using the artificial economy methodology. It successfully explains (i) the high volatility of nominal and real exchange rates, (ii) the high correlation between real and nominal rates, and (iii) the persistence of real exchange rates. It offers a neo-classical explanation for the Meese-Rogoff exchange rate forecasting puzzle.

Note: Note: SSRN is reprinting this abstract because an author's name was omitted in the last issue.

Keywords: Meese-Rogoff, Artificial Economy, Real and Nominal Exchange Rates, Habit Persistence

JEL Classification: F3, F4

Suggested Citation: Suggested Citation

Moore, Michael John and Roche, Maurice J., Volatile and Persistent Real Exchange Rates Without the Contrivance of Sticky Prices. WBS Finance Group Research Paper No. 21, Available at SSRN: https://ssrn.com/abstract=307561 or http://dx.doi.org/10.2139/ssrn.307561