Real exchange rate dynamics revisited: A case with financial market imperfections

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3 Citations (Scopus)

Abstract

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.

Original languageEnglish
Pages (from-to)1562-1589
Number of pages28
JournalJournal of International Money and Finance
Volume30
Issue number7
DOIs
Publication statusPublished - 2011 Nov 1
Externally publishedYes

Keywords

  • Financial market imperfection
  • Real exchange rate
  • Staggered loan contract

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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