Pricing-to-market, staggered contracts, and real exchange rate persistence

This paper explores an explanation for the high degree of persistence and volatility observed in real exchange rate data. In particular, it considers a class of preferences that are translogin form, which exhibit the property that the elasticity of demand is not constant. This property is shown to b...

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Bibliographic Details
Published inJournal of international economics Vol. 54; no. 2; pp. 333 - 359
Main Authors Bergin, Paul R., Feenstra, Robert C.
Format Journal Article
LanguageEnglish
Published Amsterdam Elsevier B.V 01.08.2001
Elsevier
Elsevier Sequoia S.A
SeriesJournal of International Economics
Subjects
Currency market
Data analysis
Deviation
Economic models
Economic theory
Elasticity of demand
Endogenous persistence
Exchange rates
Foreign exchange rates
Money market
Pricing
Pricing-to-market
Real exchange rate
Studies
Volatility
Pricing-to-market
F41
Real exchange rate
F31
Endogenous persistence
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Summary:This paper explores an explanation for the high degree of persistence and volatility observed in real exchange rate data. In particular, it considers a class of preferences that are translogin form, which exhibit the property that the elasticity of demand is not constant. This property is shown to be important for generating pricing-to-market behavior in price-setting firms and for helping staggered contracts to generate endogenous persistence. The paper finds that translog preferences generate significantly greater persistence in the real exchange rate than does the standard CES specification. While the model cannot fully reproduce the high level of persistence observed in the data under plausible parameter values, it can reproduce the level of volatility.
Bibliography:ObjectType-Article-2
SourceType-Scholarly Journals-1
ObjectType-Feature-1
content type line 23
ISSN:0022-1996
1873-0353
DOI:10.1016/S0022-1996(00)00091-X