Roche, Morice and Moore, Michael
Volatile and persistent real exchange rates
without the contrivance of sticky prices.
The flexible-price two-country monetary model is extended to include a consumption externality with habit persistence. The model is simulated using the artificial economy methodology. It successfully explains (i) the high volatility of nominal and real exchange rates, (ii) the high correlation between real and nominal rates, and (iii) the persistence of real exchange rates. It offers a neo-classical explanation for the Meese-Rogoff exchange rate forecasting puzzle.
||Artificial Economy; Real and Nominal Exchange Rates; Habit Persistence
||Social Sciences > Economics
Ms Sandra Doherty
||10 Feb 2005
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