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Model Trending Real Exchange Rates

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  • Maurice Obstfeld.

Abstract

The multilateral real exchange rates of major industrial countries often contain deterministic time trends. This note develops a simple stochastic model of a small open economy with a deterministically trending real exchange rate. Real exchange rate trends are caused by differential productivity growth in tradables and nontradables. Although the model assumes complete price flexibility, it can produce a correlation between the real exchange rate and the international real interest-rate differential similar to the one that arises in sticky-price overshooting models dominated by monetary shocks.
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Suggested Citation

  • Maurice Obstfeld., 1993. "Model Trending Real Exchange Rates," Center for International and Development Economics Research (CIDER) Working Papers C93-011, University of California at Berkeley.
    • Handle: RePEc:ucb:calbcd:c93-011
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    References listed on IDEAS

    as
    1. Menzie Chinn & Jeffrey Frankel, 1991. "Patterns in Exchange Rate Forecasts for 25 Currencies," NBER Working Papers 3807, National Bureau of Economic Research, Inc.
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    7. Maurice Obstfeld., 1993. "Model Trending Real Exchange Rates," Center for International and Development Economics Research (CIDER) Working Papers C93-011, University of California at Berkeley.
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    More about this item

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies

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