Owner-Used Capital Goods and the Exchange Rate Determination

39 Pages Posted: 18 Mar 2005

See all articles by Constantin Gurdgiev

Constantin Gurdgiev

Trinity College, Dublin; Middlebury Institute of International Studies at Monterey (MIIS)

Date Written: March 2005

Abstract

Present paper addresses the issue of the short and long run determination of the exchange rates in the Redux model of Obstfeld and Rogoff (1995). Current extension of the Redux model includes the investment projects that simultaneously can serve as investment allocation subject to the capital gains, as well as a regular consumption good. In contrast to the standard theoretical results, our model produces the exchange rate overshooting both in presence and in absence of price rigidities in the markets for final goods. This effect depends on the size of the owner-used capital goods expenditure relative to the total consumption expenditure, as well as the initial level of inflation at home. Depending on parameter values, and the initial conditions, the model supports possibility for exchange rate dynamics that include either overshooting or undershooting.

Keywords: Exchange Rates, Overshooting, Capital, Owner-Occupied Housing

JEL Classification: E21, E31, F31, R21

Suggested Citation

Gurdgiev, Constantin, Owner-Used Capital Goods and the Exchange Rate Determination (March 2005). IIIS Discussion Paper No. 70. Available at SSRN: https://ssrn.com/abstract=683312 or http://dx.doi.org/10.2139/ssrn.683312

Constantin Gurdgiev (Contact Author)

Trinity College, Dublin ( email )

Trinity College
Dublin 2

Middlebury Institute of International Studies at Monterey (MIIS) ( email )

460 Pierce St
Monterey, CA 93940
United States

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