"We introduce the real exchange rate volatility curve as a useful device to understand the role of price stickiness in … accounting for deviations from the Law of One Price at the sector level. In the presence of both nominal and real shocks, the … theory predicts that the real exchange rate volatility curve is a U-shaped function of the degree of price stickiness. Using …

NKPC. Specifically our model accounts for nominal inertia in both price and wage setting as well for habits in consumption … price-setting in Europe; (ii) wage contracts last longer in the US; (iii) the extent of backward-looking behaviour in price …