Can Sticky Price Models Generate Volatile and Persistent Real Exchange Rates

By V. V. Chari, Patrick J. Kehoe, Ellen R Mcgrattan. 2002

451 citations recorded by the source corpus.

The central puzzle in international business cycles is that fluctuations in real exchange rates are volatile and persistent. We quantify the popular story for real exchange rate fluctuations: they are generated by monetary shocks interacting with sticky goods prices. If prices are held fixed for at least one year, risk aversion is high, and preferences are separable in leisure, then real exchange rates generated by the model are as volatile as in the data and quite persistent, but less so than in the data. The main discrepancy between the model and the data, the consumption—real exchange rate anomaly, is that the model generates a high correlation between real exchange rates and the ratio of consumption across countries, while the data show no clear pattern between these variables. Copyright 2002, Wiley-Blackwell.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/a929510e77d7383ec42e3f4610956e4d20ae8348

Citations in the corpus

• The Yen Real Exchange Rate may be Stationary After All: Evidence from Non-linear Unit-root Tests (2004, unknown): “7Under the alternative (7) yt is stable as 1 + ̄¤©E (μyt¡d) < 1 for all yt¡d.”
• Cross-Country Heterogeneity in Intertemporal Substitution (2015, unknown): “2 (Chari et al., 2002; House & Shapiro, 2006; Piazzesi et al., 2007), or a value of 0.”
• International Prices and Exchange Rates (2013, unknown): “This is the approach adopted in Chari et al. (2002), Kehoe and Midrigan (2007), Carvalho and Nechio (2011), among others.”
• Clearing Up the Fiscal Multiplier Morass (2011, unknown): “The prior means of the substitution elasticity between foreign and domestic private consumption, investment, and government spending goods are set to 1.5, as in Chari, Kehoe, and McGrattan (2002) and IMF10/73.”
• Exchange Rate Disconnect in General Equilibrium (2017, unknown): “The speed of this mean reversion is directly controlled by the durationof nominal stickiness, which is empirically insufficient to generate long half-lives, characteristic of the real exchange rate (see, e.g., Chari, Kehoe, and McGrattan 2002).”
• Monetary Policy in a Low Pass-Through Environment (2005, unknown): “st pF,t pH,t (7) denotes the (log) terms of trade, i.”
• Monetary Policy Rules in the Open Economy: Effects on Welfare and Business Cycles (2002, unknown): “2See, for example, Batini et al. (2001), Benigno (1999), Bergin (2001), Betts and Devereux (2001), Chari et al. (2000), Collard and Dellas (2002), Dedola and Leduc (2001), Duarte and Stockman (2001), Erceg and Levin (2001), Faia (2001), Ghironi and Rebucci (2001), Hairault et al. (2001), Kollmann…”
• Portfolio Choice in a Monetary Open-Economy DSGE Model (2005, unknown): “This is in a sense a shortcoming of our model since this allocation leaves other puzzles unsolved—the high volatility of the observed exchange rate or the consumption-real exchange rate anomaly as described in Chari et al. (2002).”