DP5029 Real Exchange Rate Overshooting RBC Style

Author(s): David Meenagh, Patrick Minford, Eric Nowell, Prakriti Sofat
Publication Date: April 2005
Keyword(s): productivity, real business cycle, real exchange rate
JEL(s): E32, F31, F41
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=5029

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.