Real Exchange Rate Dynamics Beyond Business Cycles

87 Pages Posted: 15 Apr 2020 Last revised: 24 Jan 2023

See all articles by Dan Cao

Dan Cao

Georgetown University - Department of Economics

Martin D.D. Evans

Georgetown University - Department of Economics

Wenlan Luo

Tsinghua University - School of Economics & Management

Date Written: March 10, 2020

Abstract

We examine the determinants of medium-term movements in real exchange rates. Using US-UK data over the past 200 years, we find that the real exchange rate co-moves with GDP and the co-movements are significantly affected by banking crises. This relationship can be rationalized by an extension of the IRBC model with persistent productivity shocks and incomplete markets. Using a new global solution method, we demonstrate that the transmission of productivity shocks depends critically on the proximity of a national economy to its international borrowing limit. The mechanism differs from the Harrod-Balassa-Samuelson effect which does not generate these state dependent responses.

Keywords: Real Exchange Rates, International Real Business Cycles, Banking Crises, Backus-Smith Puzzle, Incomplete Markets, Global Solution Methods

JEL Classification: C60, F30, F31, F41, F44, G11

Suggested Citation

Cao, Dan and Evans, Martin D.D. and Luo, Wenlan, Real Exchange Rate Dynamics Beyond Business Cycles (March 10, 2020). Available at SSRN: https://ssrn.com/abstract=3552189 or http://dx.doi.org/10.2139/ssrn.3552189

Dan Cao

Georgetown University - Department of Economics ( email )

Washington, DC 20057
United States

Martin D.D. Evans (Contact Author)

Georgetown University - Department of Economics ( email )

Washington, DC 20057
United States
202-687-1570 (Phone)
202-687-6102 (Fax)

Wenlan Luo

Tsinghua University - School of Economics & Management ( email )

Beijing, 100084
China

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
244
Abstract Views
1,324
Rank
189,304
PlumX Metrics