Federal Reserve Bank of Dallas
Globalization Institute Working Papers
Real exchange rate dynamics revisited: a case with financial market imperfections
In this paper, we investigate the relationship between real exchange rate dynamics and financial market imperfections. For this purpose, we first construct a New Open Economy Macroeconomics (NOEM) model that incorporates staggered loan contracts as a simple form of the financial market imperfections. Our model with such a financial market friction replicates persistent, volatile, and realistic hump-shaped responses of real exchange rates, which have been thought very difficult to materialize in standard NOEM models. Remarkably, these realistic responses can materialize even with both supply and demand shocks, such as cost-push, loan rate and monetary policy shocks. This implies that the financial market developments is a key element for understanding real exchange rate dynamics.
Cite this item
Ippei Fujiwara & Yuki Teranishi, Real exchange rate dynamics revisited: a case with financial market imperfections, Federal Reserve Bank of Dallas, Globalization Institute Working Papers 62, 2010.
Note: Published as: Fujiwara, Ippei and Yuki Teranishi (2011), "Real Exchange Rate Dynamics Revisited: A Case with Financial Market Imperfections," Journal of International Money and Finance 30 (7): 1562-1589.
- F31 - International Economics - - International Finance - - - Foreign Exchange
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
This item with handle RePEc:fip:feddgw:62
is also listed on EconPapers
For corrections, contact Amy Chapman ()