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

Author(s): Carlos Carvalho, Fernanda Nechio, and Fang Yao

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.

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Article Citation

Carvalho, Carlos, Fernanda Nechio, and Fang Yao. 2019. "Monetary Policy and Real Exchange Rate Dynamics in Sticky-Price Models," Federal Reserve Bank of San Francisco Working Paper 2014-17. Available at https://doi.org/10.24148/wp2014-17