TY - JOUR
T1 - Real exchange rate dynamics revisited
T2 - A case with financial market imperfections
AU - Fujiwara, Ippei
AU - Teranishi, Yuki
PY - 2011/11
Y1 - 2011/11
N2 - 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 development is a key element for understanding real exchange rate dynamics.
AB - 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 development is a key element for understanding real exchange rate dynamics.
KW - Financial market imperfection
KW - Real exchange rate
KW - Staggered loan contract
UR - http://www.scopus.com/inward/record.url?scp=80053172733&partnerID=8YFLogxK
U2 - 10.1016/j.jimonfin.2011.06.013
DO - 10.1016/j.jimonfin.2011.06.013
M3 - Article
SN - 0261-5606
VL - 30
SP - 1562
EP - 1589
JO - Journal of International Money and Finance
JF - Journal of International Money and Finance
IS - 7
ER -