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 |
Funding
We thank Miles Kimball and an anonymous referee for their suggestions, and Pierpaolo Benigno, Mario Crucini, Andrew Levin, Carlos Vegh, Jessica Wachter, Ivan Werning, and Michael Woodford for their comments. We gratefully acknowledge financial support from the National Science Foundation and the Searle Foundation.
Keywords
- Devaluations
- Exchange rate
- Passthrough
- Sticky prices
ASJC Scopus subject areas
- Finance
- Economics and Econometrics