Can Sticky Price Models Generate Volatile and Persistent Real Exchange Rates?

V.V. Chari, Patrick J. Kehoe, Ellen R. McGrattan

NBER Working Paper No. 7869
Issued in September 2000
NBER Program(s):Economic Fluctuations and Growth, International Finance and Macroeconomics

The central puzzle in international business cycles is that real exchange rates are volatile and persistent. The most popular story for real exchange rate fluctuations is that they are generated by monetary shocks interacting with sticky goods prices. We quantify this story and find that it can account for some of the observed properties of real exchange rates. When prices are held fixed for at least one year, risk aversion is high and preferences are separable in leisure, the model generates real exchange rates that are as volatile as in the data. The model also generates real exchange rates that are persistent, but less so than in the data. If monetary shocks are correlated across countries, then the comovements in aggregates across countries are broadly consistent with those in the data. Making asset markets incomplete or introducing sticky wages does not measurably change the results.

download in pdf format
   (583 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w7869

Published: Chari, V. V., Patrick J. Kehoe and Ellen R. McGrattan. "Can Sticky Price Models Generate Volatile And Persistent Real Exchange Rates?," Review of Economic Studies, 2002, v69(3,240,Jul), 533-563. citation courtesy of

Users who downloaded this paper also downloaded* these:
Chari, Kehoe, and McGrattan w5809 Sticky Price Models of the Business Cycle: Can the Contract Multiplier Solve the Persistence Problem?
Chari, Kehoe, and McGrattan w5876 Monetary Shocks and Real Exchange Rates in Sticky Price Models of International Business Cycles
Obstfeld and Rogoff The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?
Devereux and Engel w7665 Monetary Policy in the Open Economy Revisited: Price Setting and Exchange Rate Flexibility
Christiano, Eichenbaum, and Evans w8403 Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us