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Can International Macroeconomic Models Explain Low-Frequency Movements of Real Exchange Rates?

Author/Editor: Pau Rabanal | Juan F. Rubio-Ramirez
Authorized for Distribution: January 1, 2012
Electronic Access: Free Full Text (PDF file size is 1,127KB)
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.

Summary: Real exchange rates exhibit important low-frequency fluctuations. This makes the analysis of real exchange rates at all frequencies a more sound exercise than the typical business cycle one, which compares actual and simulated data after the Hodrick-Prescott filter is applied to both. A simple two-country, two-good model, as described in Heathcote and Perri (2002), can explain the volatility of the real exchange rate when all frequencies are studied. The puzzle is that the model generates too much persistence of the real exchange rate instead of too little, as the business cycle analysis asserts. Finally, we show that the introduction of adjustment costs in production and in portfolio holdings allows us to reconcile theory and this feature of the data.
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Series: Working Paper No. 12/13
Frequency: Monthly
Subject(s): Economic models | Real effective exchange rates
Author's keyword(s): International Business Cycles | Spectrum | Real Exchange Rates | Cointegration.
    Published:   January 1, 2012        
    ISBN/ISSN:   9781463931186/1018-5941   Format:   Paper
    Stock No:   WPIEA2012013   Pages:   42
    Price:   US$18.00
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