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The Exchange Rate in a Dynamic-Optimizing Business Cycle Model with Nominal Rigidities: A Quantitative Investigation
2001
Social Science Research Network
This paper studies a quantitative dynamic-optimizing business cycle model of a small open economy with staggered price and wage setting. The model exhibits exchange rate overshooting in response to money supply shocks. The predicted variability of the nominal and, especially, of the real exchange rate is noticeably higher than in standard Real Business Cycle models with flexible prices and wages. A positive domestic money supply shock is predicted to lower the domestic interest rate, raise GDP,
doi:10.2139/ssrn.267493
fatcat:o3edyi3nrfb75hp3cirbsh6i7a