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Real exchange rate dynamics in the New-Keynesian model

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  • Kamalyan, Hayk

Abstract

This paper studies the real exchange rate adjustment process in the baseline small open economy New-Keynesian framework. The paper shows that i) the version of the model with real shocks replicates the persistence and the hump-shaped dynamics of the real exchange rate observed in the data, and ii) the model cannot simultaneously match the observed dynamics of the real exchange rate and the close co-movement between the real and nominal currency returns. Thus, the baseline framework cannot fully capture the real exchange rate adjustment process.

Suggested Citation

  • Kamalyan, Hayk, 2023. "Real exchange rate dynamics in the New-Keynesian model," International Economics, Elsevier, vol. 174(C), pages 250-255.
    • Handle: RePEc:eee:inteco:v:174:y:2023:i:c:p:250-255
    DOI: 10.1016/j.inteco.2023.04.004
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    References listed on IDEAS

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    More about this item

    Keywords

    Real exchange rate adjustment; Nominal-real exchange rate co-movement; New keynesian model; Monetary policy rule;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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