A Neo-Classical Explanation of Nominal Exchange Rate Volatility

32 Pages Posted: 24 Sep 2004  

Michael Moore

University of Warwick - Warwick Business School

Maurice J. Roche

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

Date Written: September 2004

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 the high volatility of nominal exchange rates without recourse to sticky prices and overshooting. Nominal exchange rates are volatile because of real exchange rate variability. This, in turn, arises because the marginal rate of substitution between home and foreign goods is volatile because of the habit persistence externality.

Keywords: Artificial economy, nominal exchange rates, habit persistence

JEL Classification: F3, F4

Suggested Citation

Moore, Michael and Roche, Maurice J., A Neo-Classical Explanation of Nominal Exchange Rate Volatility (September 2004). Available at SSRN: https://ssrn.com/abstract=594901 or http://dx.doi.org/10.2139/ssrn.594901

Michael John Moore (Contact Author)

University of Warwick - Warwick Business School ( email )

Coventry CV4 7AL
United Kingdom

Maurice J. Roche

National University of Ireland, Maynooth (NUI Maynooth) - Department of Economics ( email )

County Kildare
Ireland
+353 1 7083786 (Phone)
+353 1 7083934 (Fax)

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