This paper uses a 'new open economy macroeconomics' model to study the effect of a productivity shock on exchange rate dynamics. The special features of the model are that households' preferences exhibit a 'catching up with the Joneses' effect and that international financial markets are...

A number of empirical studies have reported the result that exchange rates show a delayed overshooting in response to monetary policy shocks. This result is puzzling. Economic theory suggests that the overshooting should occur immediately after the shock, not with a delay. This paper uses a ?new...

A number of empirical studies have reported the result that exchange rates show a delayed overshooting in response to monetary policy shocks. This result is puzzling. Economic theory suggests that the overshooting should occur immediately after the shock, not with a delay. This paper uses a...

This study explores the sources of real exchange rate fluctuations under the current float. Using a cointegration model of the real exchange rate, the innovations are decomposed into transitory and common-trend components. Both transitory and common-trend innovations are found to explain an...

Exchange rates in Latin America display a large volatility, constitute a central element of the policy strategies and their evolution have an important impact on financial stability due to the dollarization of liabilities which most countries exhibit. However, assessments on equilibrium exchange...

We show that expansionary monetary policy causes exchange rate overshooting due to the secondary repercussion comes through the reaction of firms to changed asset prices and the firms’ decisions to invest in real capital. This overshooting effect adds to any overshooting that occurs through...

We show that expansionary monetary policy causes exchange rate overshooting due to the secondary repercussion comes through the reaction of firms to changed asset prices and the firms' decisions to invest in real capital. This overshooting effect adds to any overshooting that occurs through the...

Empirical evidence suggests that a monetary shock induces the exchange rate to overshoot its long-run level. The estimated magnitude and timing of the overshooting, however, varies across studies. This paper generates delayed overshooting in a new Keynesian model of a small open economy by...

While exchange rate dynamics is an important topic in open economy macroeconomics, the standard tool commonly used to introduce exchange rate dynamics - the Dornbusch (1976) seminal paper along with phase diagram - is not well-suited for undergraduate students as most of them do not have yet a...

Empirical evidence suggests that a monetary shock induces the exchange rate to overshoot its long-run level. The estimated magnitude and timing of the overshooting, however, varies across studies. This paper generates delayed overshooting in a new Keynesian model of a small open economy by...