Hostname: page-component-586b7cd67f-t7fkt Total loading time: 0 Render date: 2024-11-23T08:43:57.175Z Has data issue: false hasContentIssue false
  • English
  • Français

EXCHANGE RATE DYNAMICS, ASSET MARKET STRUCTURE, AND THE ROLE OF THE TRADE ELASTICITY

Published online by Cambridge University Press:  07 April 2010

Christoph Thoenissen
Christoph Thoenissen*
Affiliation:
Victoria University of Wellington
*
Address correspondence to: Christoph Thoenissen, School of Economics and Finance, Victoria University of Wellington, P.O. Box 600, Wellington, New Zealand; e-mail: [email protected].
Get access Rights & Permissions [Opens in a new window]

Abstract

A canonical flexible-price international real–business cycle model with incomplete financial markets can address the exchange rate–volatility puzzle, the exchange rate–persistence puzzle, and the consumption real–exchange rate anomaly, as well as the quantity anomaly. Crucial for the success of the model is the choice of the elasticity of substitution between home and foreign produced goods. The paper shows that the range of this parameter that allows the model to address these international macroeconomics anomalies is very narrow. Furthermore, the paper highlights an anomalous relationship between real–exchange rate persistence and the elasticity of substitution between home- and foreign-produced goods.

Keywords

Real Exchange Rate DynamicsIncomplete Financial MarketsBackus–Smith PuzzleExchange Rate PersistenceTrade Elasticity
Type
Articles
Information
Macroeconomic Dynamics , Volume 15 , Issue 1 , February 2011 , pp. 119 - 143
Copyright
Copyright © Cambridge University Press 2010

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Backus, D.K., Kehoe, P.J., and Kydland, F.E. (1994) Dynamics of the trade balance and the terms of trade: The J-curve? American Economic Review 84, 84–103.Google Scholar
Backus, D.K., Kehoe, P.J., and Kydland, F.E. (1995) International business cycles: Theory and evidence. In Cooley, Thomas F. (ed.), Frontiers of Business Cycle Research, pp. 331–356. Princeton, NJ: Princeton University Press.CrossRefGoogle Scholar
Backus, D.K. and Smith, G.W. (1993) Consumption and real exchange rates in dynamic economies with non-traded goods. Journal of International Economics 35, 297–316.CrossRefGoogle Scholar
Benigno, G. and Thoenissen, C. (2008) Consumption and real exchange rates with incomplete financial markets and non-traded goods. Journal of International Money and Finance 27, 926–948.CrossRefGoogle Scholar
Chari, V.V., Kehoe, P.J., and McGrattan, E.R. (2002) Can sticky price models generate volatile and persistent real exchange rates? Review of Economic Studies 69, 633–663.CrossRefGoogle Scholar
Christiano, L.J., Eichenbaum, M., and Evans, C. (2005) Nominal rigidities and the dynamic effects of a shock to monetary policy. Journal of Political Economy 113, 1–45.CrossRefGoogle Scholar
Cole, H. and Obstfeld, M. (1991) Commodity trade and international risk sharing: How much do financial markets matter? Journal of Monetary Economics 28, 3–24.CrossRefGoogle Scholar
Corsetti, G., Dedola, L., and Leduc, S. (2006) Productivity, external balance and exchange rates: Evidence on the transmission mechanism among G7 countries. In Reichlin, Lucrezia and West, Kenneth (eds.), NBER International Seminar on Macroeconomics, pp. 117–194. Chicago: Chicago University Press.Google Scholar
Corsetti, G., Dedola, L., and Leduc, S. (2008a) High exchange-rate volatility and low pass-through. Journal of Monetary Economics 55, 1113–1128.CrossRefGoogle Scholar
Corsetti, G., Dedola, L., and Leduc, S. (2008b) International risk sharing and the transmission of productivity shocks. Review of Economic Studies 75, 443–473.CrossRefGoogle Scholar
Enders, Z. and Müller, G.J. (2009) On the international transmission of technology shocks. Journal of International Economics 78, 45–59.CrossRefGoogle Scholar
Groth, C. and Kahn, H. (2007) Investment Adjustment Costs: Evidence from UK and US Industries. Working paper 332, Bank of England.CrossRefGoogle Scholar
Hansen, G.D. (1985) Indivisible labour and the business cycle. Journal of Monetary Economics 16, 309–327.CrossRefGoogle Scholar
Heathcote, J. and Perri, F. (2002) Financial autarky and international business cycles. Journal of Monetary Economics 49, 601–627.CrossRefGoogle Scholar
King, R. and Watson, M. (1998) The solution of singular linear difference systems under rational expectations. International Economic Review 39, 1015–1026.CrossRefGoogle Scholar
Kollmann, R. (2006) Comment on “Productivity, external balance and exchange rates: Evidence on the transmission mechanism among G7 countries,” by a Corsetti et al. In Reichlin, Lucrezia and West, Kenneth (eds.), NBER International Seminar on Macroeconomics, pp. 117–194. Chicago: Chicago University Press.Google Scholar
Mendoza, E. (1991) Real business cycles in a small open economy. American Economic Review 81, 797–818.Google Scholar
Schmitt-Grohé, S. and Uribe, M. (2003) Closing small open economy models. Journal of International Economics 61, 163–185.CrossRefGoogle Scholar
Schmitt-Grohé, S. and Uribe, M. (2004) Optimal Operational Monetary Policy in the Christiano–Eichenbaum–Evans Model of the U.S. Business Cycle. Mimeo, Duke University.CrossRefGoogle Scholar
Smets, F. and Wouters, R. (2004) Comparing shocks and frictions in US and euro area business cycles: A Bayesian DSGE approach. Journal of Applied Econometrics 20, 161–183.CrossRefGoogle Scholar
Stockman, A.C. and Tesar, L.L. (1995) Tastes and technology in a two-country model of the business cycle: Explaining international comovements. American Economic Review 85, 168–185.Google Scholar
Thoenissen, C. (2008) Exchange rate dynamics, asset market structure and the role of the trade elasticity. CDMA Working paper 08/03, St Andrews University.CrossRefGoogle Scholar
Woodford, M. (2003) Interest and Prices. Princeton, NJ: Princeton University Press.Google Scholar