Model Trending Real Exchange Rates

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.


Issue Date:
1993-02
Publication Type:
Working or Discussion Paper
DOI and Other Identifiers:
Record Identifier:
https://ageconsearch.umn.edu/record/233187
PURL Identifier:
http://purl.umn.edu/233187
Total Pages:
31
JEL Codes:
F41; F43
Series Statement:
Working Paper
C93-011




 Record created 2017-04-01, last modified 2020-10-28

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