Expectations and exchange rate dynamics: A state-dependent pricing approach
This paper presents a two-country DSGE model with state-dependent pricing as in Dotsey et al. [Dotsey, M., King, R.G., and Wolman, A.L., 1999. State-dependent pricing and the general equilibrium dynamics of money and output. Quarterly Journal of Economics 114, 655–690] and variable demand elasticity...
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Published in | Journal of international economics Vol. 78; no. 1; pp. 60 - 71 |
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Main Author | |
Format | Journal Article |
Language | English |
Published |
Amsterdam
Elsevier B.V
01.06.2009
Elsevier Elsevier Sequoia S.A |
Series | Journal of International Economics |
Subjects | |
Online Access | Get full text |
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Summary: | This paper presents a two-country DSGE model with state-dependent pricing as in Dotsey et al. [Dotsey, M., King, R.G., and Wolman, A.L., 1999. State-dependent pricing and the general equilibrium dynamics of money and output. Quarterly Journal of Economics 114, 655–690] and variable demand elasticity as in Kimball [Kimball, M.S., 1995. The quantitative analytics of the basis neomonetarist model. Journal of Money, Credit, and Banking 27, 1241–1277]. Following a domestic monetary expansion, the model predicts: (i) positive hump-shaped responses of domestic output and consumption, (ii) positive spillover effects on foreign output and consumption, (iii) a high international output correlation relative to consumption correlation, (iv) a delayed increase in domestic and foreign inflation, (v) a delayed nominal exchange rate overshooting, (vi) a deterioration in the terms of trade, and (vii) a J-curve in the trade balance. The model matches the impulse responses from an identified VAR more closely than an otherwise identical model with time-dependent pricing. |
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Bibliography: | ObjectType-Article-2 SourceType-Scholarly Journals-1 ObjectType-Feature-1 content type line 23 |
ISSN: | 0022-1996 1873-0353 |
DOI: | 10.1016/j.jinteco.2009.01.010 |