The exchange rate in a dynamic-optimizing business cycle model with nominal rigidities: a quantitative investigation
نویسنده
چکیده
This paper studies a quantitative dynamic-optimizing business cycle model of a small open economy with staggered price and wage setting. The model exhibits exchange rate overshooting in response to money supply shocks. The predicted variability of the nominal and, especially, of the real exchange rate is noticeably higher than in standard Real Business Cycle models with flexible prices and wages. A positive domestic money supply shock is predicted to lower the domestic interest rate, raise GDP, and trigger a depreciation of both the nominal and real exchange rate. Increases in domestic productivity and in the world interest rate are also predicted to induce a nominal and real exchange rate depreciation. 2001 Elsevier Science B.V. All rights reserved.
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