@techreport{NBERw5876,
 title = "Monetary Shocks and Real Exchange Rates in Sticky Price Models of International Business Cycles",
 author = "V. V. Chari and Patrick J. Kehoe and Ellen R. McGrattan",
 institution = "National Bureau of Economic Research",
 type = "Working Paper",
 series = "Working Paper Series",
 number = "5876",
 year = "1997",
 month = "January",
 URL = "http://www.nber.org/papers/w5876",
 abstract = {The data show large and persistent deviations of real exchange rates from purchasing power parity.  Recent work has shown that to a large extent these movements are driven by deviations from the law of one price for traded goods.  In the data, real and nominal exchange rates are about 6 times as volatile as relative price levels and they both are highly persistent, with serial correlations of 0.85 and 0.83, respectively.  This paper develops a sticky price model with price discriminating monopolists, which produces deviations from the law of one price for traded goods. Our benchmark model, which has prices set for one quarter at a time and a unit consumption elasticity of money demand, does not come close to reproducing these observations.  A model which has producers setting prices for 6 quarters at a time and a consumption elasticity of money demand of 0.27 does much better. In it real and nominal exchange rates are about 3 times as volatile as relative price levels and exchange rates are persistent, with serial correlations of 0.65 and 0.66, respectively.},
}