Working Paper: NBER ID: w1281
Authors: Alberto Giovannini; Julio J. Rotemberg
Abstract: This paper estimates simultaneously dynamic equations for the Deutsche Mark/Dollar exchange rate and the German wholesale price index, which emerge from a model in which German prices are sticky. This stickiness is due to price adjustment costs which take the form posited by Rotemberg(1982).The main results of the empirical analysis are two: First, the version of the model where prices are perfectly flexible is rejected. Second, real exchange rate variability is mostly accounted for by nominal exchange rate variability. We find substantial overshooting of the exchange rate to monetary innovations like those which appear to be typical in Germany.
Keywords: Exchange Rates; Sticky Prices; Monetary Policy; Overshooting
JEL Codes: E31; E52; F31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Changes in nominal exchange rates (F31) | Fluctuations in real exchange rates (F31) |
| Increase in money supply (E51) | Immediate depreciation of exchange rate (F31) |
| Immediate depreciation of exchange rate (F31) | Overshooting of exchange rate (F31) |
| Monetary shocks (E39) | Gradual response of domestic prices (P22) |
| Monetary shocks (E39) | Dynamic adjustment process of prices (E30) |
| Increase in money stock (E51) | No real effects in the long run (G40) |