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.
Article Citation
Carvalho, Carlos, Fang Yao, and Fernanda Nechio. 2014. “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