Real exchange rate fluctuations, endogenous tradability and exchange rate regimes |
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Authors: | Kanda Naknoi |
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Affiliation: | Krannert Graduate School of Management, Purdue University, West Lafayette, IN 47907, USA |
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Abstract: | The real exchange rate is driven by fluctuations of the relative price of traded goods and the relative price of nontraded to traded goods. This study explains the variance decomposition of the real exchange rate using a stochastic dynamic general equilibrium model of comparative advantage with money. Given interest rate shocks, exchange rate stability reduces the covariance between the two relative prices and raises the contribution of the relative price of nontraded to traded goods. Productivity shocks do not alter the covariance across exchange rate regimes and let the relative price of traded goods drive the real exchange rate. |
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Keywords: | F41 F42 |
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