Working Papers

2014-17 | September 2017

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Monetary Policy and Real Exchange Rate Dynamics in Sticky-Price Models

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We study how real exchange rate dynamics are affected by monetary policy in dynamic, stochastic, general equilibrium, sticky-price models. Our analytical and quantitative results show that the source of interest rate persistence - policy inertia or persistent policy shocks - is key. In the presence of persistent monetary shocks, increasing policy inertia may decrease real exchange rate persistence, hampering the ability of sticky-price models to generate persistent real exchange rate deviations from parity. When we take the model to the data, the latter favors a policy rule with high shock persistence and low policy inertia.

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