Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/76032
Authors: 
Böhm, Volker
Kikuchi, Tomoo
Year of Publication: 
2002
Series/Report no.: 
CESifo Working Paper 797
Abstract: 
This paper studies dynamics of endogenous business cycles and exchange rate volatility in a small open economy. Without market imperfections, domestic price and wage adjustments respond sluggishly to disequilibrium situations on real domestic markets while prices on international capital markets adjust instantaneously. The expectation formation mechanism under uncovered interest rate parity (UIP) induces a channel transmitting potential domestic real fluctuations into exchange rate fluctuations and vice versa. The interaction of the expectations feed back with the adjustment mechanism causes exchange rates to exhibit a higher volatility than other prices. The numerical analysis shows examples which confirm the typical empirically observed high volatility of nominal exchange rates compared with that of real/domestic variables.
Subjects: 
This paper studies dynamics of endogenous business cycles and exchange rate volatility in a small open economy. Without market imperfections
domestic price and wage adjustments respond sluggishly to disequilibrium situations on real domestic markets whil
Document Type: 
Working Paper

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