Real Exchange Rate Volatility and the Price of Nontradable Goods in Economies Prone to Sudden Stops

Economía ◽  
2005 ◽  
Vol 6 (1) ◽  
pp. 103-148 ◽  
Author(s):  
Enrique G. Mendoza
Keyword(s):  
Exchange Rate ◽  
Real Exchange Rate ◽  
Exchange Rate Volatility ◽  
Sudden Stops ◽  
Nontradable Goods ◽  
Real Exchange Rate Volatility

Revisiting real exchange rate volatility: non-traded goods and cointegrated TFP shocks

2019 ◽  
Vol 72 (1) ◽  
pp. 80-100 ◽  
Author(s):  
Aydan Dogan ◽  
Timo Bettendorf
Keyword(s):  
Exchange Rate ◽  
Real Exchange Rate ◽  
Exchange Rate Volatility ◽  
Technology Shocks ◽  
Correction Model ◽  
Vector Error Correction ◽  
Traded Goods ◽  
Vector Error ◽  
The Uk ◽  
Real Exchange Rate Volatility

Abstract International real business cycle (IRBC) models predict a real exchange rate volatility that is much lower than the levels observed in the data. In this paper, we build a two-country IRBC model with both a traded and a non-traded goods sector, and calibrate it to UK-euro area (EA) data. We provide evidence on the existence of a cointegrating relationship between UK and EA traded sector total factor productivity (TFP) by estimating a vector error correction model (VECM). To account for this relationship, we incorporate non-stationary technology shocks in the traded sectors in our model, and show that then the model is able to match the observed volatility of the UK–EA real exchange rate. Our analysis points out that both the presence of non-traded sectors and non-stationary technology shocks are necessary to account for the observed volatility in the real exchange rate.

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