This paper uses a DSGE model of two small open economies to explain certain features of real exchange rate cyclical fluctuations in countries with fixed and flexible exchange rates, focusing on the role of traded and non-traded goods prices. In particular, the model illustrates why the relative...

This paper examines the effect of overall and sector-specific productivity shocks on the real exchange rate in small open economies. A dynamic stochastic small open economy model shows that productivity shocks impact the real exchange rate mostly through changes in the relative price of...

This paper presents a model of self-fulfilling currency crises in economies that do not suffer from domestic liability dollarization but whose international borrowing is subject to a collateral constraint. The model shows that when the collateral is a non-traded asset the expectation of a real...

This paper uses a two-country dynamic stochastic general equilibrium model (DSGE) to study how different characteristics of an economy, such as openness or price stickiness, affect the contribution of the relative price of non-traded goods to real exchange rate fluctuations. The model shows that...

Real exchange rate variance decompositions indicate that only a small fraction of real exchange rate movements can be attributed to changes in the relative price between traded and non-traded goods. This paper argues that those exercises, by ignoring the nature of the shocks behind real exchange...

Previous studies have shown that, under certain conditions, a central bank could achieve a better trade-off between inflation and output volatility by replacing its inflation target with a price-level target. This paper studies whether a Taylor rule that targets the price-level instead of the...