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Technical note on "The real exchange rate in sticky price models: does investment matter?"
This technical note is developed in part as a mathematical companion to the paper ?The Real Exchange Rate in Sticky Price Models: Does Investment Matter?? (GMPI working paper no. 17). Our two-country model incorporates capital accumulation with adjustment costs, variable capital utilization and investment-specific technological shocks. Nominal rigidities and monopolistic competition distort the goods markets of each country and allow monetary policy to have real effects. We investigate two different international pricing scenarios, local-currency pricing (where the law of one price fails) and ...
Investment and trade patterns in a sticky-price, open-economy model
This paper develops a tractable two-country DSGE model with sticky prices la Calvo (1983) and local-currency pricing. We analyze the capital investment decision in the presence of adjustment costs of two types, the capital adjustment cost (CAC) specification and the investment adjustment cost (IAC) specification. We compare the investment and trade patterns with adjustment costs against those of a model without adjustment costs and with (quasi-) flexible prices. We show that having adjustment costs results into more volatile consumption and net exports, and less volatile investment. We ...
The real exchange rate in sticky price models: does investment matter?
This paper re-examines the ability of sticky-price models to generate volatile and persistent real exchange rates. We use a DSGE framework with pricing-to-market akin to those in Chari, et al. (2002) and Steinsson (2008) to illustrate the link between real exchange rate dynamics and what the model assumes about physical capital. We show that adding capital accumulation to the model facilitates consumption smoothing and significantly impedes the model's ability to generate volatile real exchange rates. Our analysis, therefore, caveats the results in Steinsson (2008) who shows how real shocks ...