Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/264645 
Year of Publication: 
2001
Series/Report no.: 
Working Paper No. 53
Publisher: 
Oesterreichische Nationalbank (OeNB), Vienna
Abstract: 
Since the adoption of flexible exchange rates, real exchange rates have been much more volatile than they were under Bretton Woods. However, the volatilities of most other macroeconomic variables have remained approximately unchanged. This poses a puzzle for standard international business cycle models. This paper develops a two-country, two-sector model with nominal rigidities featuring deviations from the law of one price due to firms setting prices in buyers' currencies. By partially insulating goods markets across countries and thus mitigating the international expenditure-switching effect, this pricing behavior is found to considerably dampen the responses of quantities to shocks hitting the economies therefore helping to account for the puzzle.
JEL: 
E32
E52
F31
F33
F41
Document Type: 
Working Paper

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