Working Paper: CEPR ID: DP5029
Authors: David Meenagh; Patrick Minford; Eric Nowell; Prakriti Sofat
Abstract: This paper establishes the ability of a Real Business Cycle model to account for real exchange rate (RXR) behaviour, using UK experience as empirical focus. We show that a productivity burst simulation is capable of explaining the appreciation of RXR and its cyclical pattern observed in the data. We then test if our model is consistent with the facts. We bootstrap our model to generate pseudo RXR series and check if the ARIMA parameters estimated for the data lie within 95% confidence limits implied by our model. We find that RXR behaviour is explicable within an RBC framework.
Keywords: productivity; real business cycle; real exchange rate
JEL Codes: E32; F31; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| productivity shocks (O49) | RXR (Y60) |
| deterministic productivity growth shock (O49) | RXR appreciation (Y60) |
| increased productivity (O49) | permanent income (D31) |
| permanent income (D31) | investment (G31) |
| investment (G31) | RXR (Y60) |
| RXR (Y60) | expected future value (G17) |
| higher real interest rate (E43) | RXR (Y60) |