Real Exchange Rate Overshooting RBC Style

55 Pages Posted: 12 Sep 2005

See all articles by Prakriti Sofat

Prakriti Sofat

Cardiff University Business School

Patrick Minford

Cardiff University Business School; Centre for Economic Policy Research (CEPR)

Eric Nowell

University of Liverpool Management School (ULMS) - Economics Division

David Meenagh

Cardiff University Business School

Date Written: April 2005

Abstract

This paper establishes the ability of a Real Business Cycle model to account for real exchange rate (RXR) behaviour, using UK experience as empirical focus. We show that a productivity burst simulation is capable of explaining the appreciation of RXR and its cyclical pattern observed in the data. We then test if our model is consistent with the facts. We bootstrap our model to generate pseudo RXR series and check if the ARIMA parameters estimated for the data lie within 95% confidence limits implied by our model. We find that RXR behavior is explicable within an RBC framework.

Keywords: Real exchange rate, productivity, real business cycle

JEL Classification: E32, F31, F41

Suggested Citation

Sofat, Prakriti and Minford, Patrick and Nowell, Eric and Meenagh, David, Real Exchange Rate Overshooting RBC Style (April 2005). CEPR Discussion Paper No. 5029, Available at SSRN: https://ssrn.com/abstract=772910

Prakriti Sofat (Contact Author)

Cardiff University Business School ( email )

Aberconway Building
Colum Drive
Cardiff, CF10 3EU
United Kingdom

Patrick Minford

Cardiff University Business School ( email )

Aberconway Building
Colum Drive
Cardiff, CF10 3EU
United Kingdom
+44 29 2087 5728 (Phone)
+44 29 2087 4419 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Eric Nowell

University of Liverpool Management School (ULMS) - Economics Division ( email )

Eleanor Rathbone Building
Bedford Street North
Liverpool L69 7ZA
United Kingdom
+44 15 1794 3058 (Phone)
+44 15 1794 3032 (Fax)

David Meenagh

Cardiff University Business School ( email )

Aberconway Building
Colum Drive
Cardiff, CF10 3EU
United Kingdom
+44 29 2087 5198 (Phone)
+44 29 2087 4419 (Fax)

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