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 reconciles the persistence of aggregate real exchange rates with the faster adjustment of international relative prices in microeconomic data. Panel estimation of an error correction model using a micro data set uncovers new stylized facts regarding this puzzle. First, adjustment to...

This paper reconciles the persistence of aggregate real exchange rates with the faster adjustment of international relative prices in microeconomic data. Panel estimation of an error correction model using a micro data set uncovers new stylized facts regarding this puzzle. First, adjustment to...