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

January 1, 2012

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Format: Chicago

Pau Rabanal, and Juan F. Rubio-Ramirez Can International Macroeconomic Models Explain Low-Frequency Movements of Real Exchange Rates?, (USA: International Monetary Fund, 2012) accessed November 8, 2024

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.

Subject: Consumption, National accounts, Production, Production growth, Total factor productivity

Keywords: Adjustment cost, Cointegration, Consumption, Cost function, International Business Cycles, Production growth, Real Exchange Rates, RER fluctuation, RER spectrum, RER volatility, Spectrum, Standard deviation, Total factor productivity, U.S. dollar, U.S. dollar RER, WP

Publication Details

Pages:

42
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2012/013
Stock No:

WPIEA2012013
ISBN:

9781463931186
ISSN:

1018-5941

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