A puzzle in international macroeconomics is that observed real exchange rates are highly volatile. Standard international real business cycle (IRBC) models cannot reproduce this fact. We show that TFP processes for the U.S. and the ""rest of the world,"" is characterized by a vector error...

This paper investigates the consequences of pricing to market for exchange rate pass-through and real exchange rate dynamics across different patterns of trade under market segmentation. Under two-way, intraindustry trade--where home prices display greater linkage with those of foreign...