Abstract
Large devaluations are generally associated with large declines in real exchange rates. We develop a model which embodies two complementary forces that account for the large declines in the real exchange rate that occur in the aftermath of large devaluations. The first force is sticky nontradable-goods prices. The second force is the impact of real shocks that often accompany large devaluations. We argue that sticky nontradable goods prices generally play an important role in explaining post-devaluation movements in real exchange rates. However, real shocks can sometimes be primary drivers of real exchange-rate movements.
Original language | English (US) |
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Pages (from-to) | 346-368 |
Number of pages | 23 |
Journal | Journal of Monetary Economics |
Volume | 54 |
Issue number | 2 |
DOIs | |
State | Published - Mar 2007 |
Keywords
- Devaluations
- Exchange rate
- Passthrough
- Sticky prices
ASJC Scopus subject areas
- Finance
- Economics and Econometrics