TY - JOUR AU - Chari,V. V. AU - Kehoe,Patrick J. AU - McGrattan,Ellen R. TI - Monetary Shocks and Real Exchange Rates in Sticky Price Models of International Business Cycles JF - National Bureau of Economic Research Working Paper Series VL - No. 5876 PY - 1997 Y2 - January 1997 UR - http://www.nber.org/papers/w5876 L1 - http://www.nber.org/papers/w5876.pdf N1 - Author contact info: Varadarajan V. Chari Department of Economics University of Minnesota 1035 Heller Hall 271 - 19th Avenue South Minneapolis, MN 55455 Tel: 612/626-5171 Fax: (612) 624-0209 E-Mail: varadarajanvchari@gmail.com Patrick Kehoe Research Department Federal Reserve Bank of Minneapolis 90 Hennepin Avenue Minneapolis, MN 55480-0291 Tel: 612/204-5525 Fax: 612/204-5515 E-Mail: pkehoe@res.mpls.frb.fed.us Ellen McGrattan Research Department Federal Reserve Bank of Minneapolis 90 Hennepin Avenue Minneapolis, MN 55480 Tel: 612/204-5523 Fax: 612/204-5515 E-Mail: erm@mcgrattan.mpls.frb.fed.us AB - 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. ER -