Dynamics of Endogenous Business Cycles and Exchange Rate Volatility

Arbeitspapier

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.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: CESifo Working Paper ; No. 797

Classification and Topics

• Classification: Wirtschaft
• Subject: 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

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Böhm, Volker ; Kikuchi, Tomoo
• Event: Veröffentlichung
• (who): Center for Economic Studies and ifo Institute (CESifo)
• (where): Munich
• (when): 2002

Further information

• Handle: http://hdl.handle.net/10419/76032
• Last update: 10.03.2025, 11:44 AM CET