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Real Exchange Rate Dynamics under Staggered Loan Contracts

Author

Listed:
  • Ippei Fujiwara

    (Director, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: ippei.fujiwara @boj.or.jp))

  • Yuki Teranishi

    (Associate Director, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: yuuki.teranishi @boj.or.jp))

Abstract

In this paper, we investigate the relationship between real exchange rate dynamics and financial market imperfections. For this purpose, we first construct a New Open Economy Macroeconomics (NOEM) model that incorporates international staggered loan contracts as a simple form of the financial market imperfections. Recent empirical studies show that such staggered loan contracts are prevalent in the US, UK, and Japan and direct shocks to the bank lending interest rate (risk premium shocks) are major drivers of business cycle dynamics. Simulation results only with such a financial market friction and a risk premium shock can generate persistent, volatile, and realistic hump-shaped responses of real exchange rates, which have been thought very difficult to reproduce in standard NOEM models. This implies that these financial market developments can possibly be a major source of real exchange rate fluctuations.

Suggested Citation

  • Ippei Fujiwara & Yuki Teranishi, 2008. "Real Exchange Rate Dynamics under Staggered Loan Contracts," IMES Discussion Paper Series 08-E-11, Institute for Monetary and Economic Studies, Bank of Japan.
    • Handle: RePEc:ime:imedps:08-e-11
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    References listed on IDEAS

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    Cited by:

    1. Ippei Fujiwara & Yuki Teranishi, 2009. "Financial Stability in Open Economies," IMES Discussion Paper Series 09-E-09, Institute for Monetary and Economic Studies, Bank of Japan.

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    More about this item

    Keywords

    Financial Market Imperfections; Real Exchange Rates; Staggered Loan Contracts;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money

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