Abstract
The flexible-price two-country monetary model is extended to include a consumption externality with habit persistence. Two methodologies are employed to explore this model's ability to generate volatile and persistent exchange rates. In the first, actual data is used for the exogenous driving processes. In the second, the model is simulated using estimated forcing processes. The theory, in both cases, is capable of explaining the high volatility and persistence of real and nominal exchange rates as well as the high correlation between real and nominal rates. © 2007 Elsevier B.V. All rights reserved.
Original language | English |
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Pages (from-to) | 423-433 |
Number of pages | 11 |
Journal | Journal of Monetary Economics |
Volume | 55 |
Issue number | 2 |
DOIs | |
Publication status | Published - Mar 2008 |
ASJC Scopus subject areas
- Economics and Econometrics
- Finance