Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/176111 
Year of Publication: 
2014
Series/Report no.: 
Texto para discussão No. 628
Publisher: 
Pontifícia Universidade Católica do Rio de Janeiro (PUC-Rio), Departamento de Economia, Rio de Janeiro
Abstract: 
We study how real exchange rate dynamics are affected by monetary policy in dynamic, stochastic, general equilibrium, sticky-price models. Our analytical and quantitative results show that the source of interest rate persistence - policy inertia or persistent policy shocks - is key. When the monetary policy rule has a strong interest rate smoothing component, these models fail to generate high real exchange rate persistence in response to monetary shocks, as policy inertia hampers their ability to generate a hump-shaped response to such shocks. Moreover, in the presence of persistent monetary shocks, increasing policy inertia may decrease real exchange rate persistence.
Subjects: 
real exchange rates
monetary policy
interest rate smoothing
PPP puzzle
persis- tence
JEL: 
F3
F41
E0
Document Type: 
Working Paper

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