Cooke, Dudley and Kara, Engin ![]() ![]() |
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Abstract
This paper develops an open economy New Keynesian model in which shocks to monetary policy generate delayed nominal exchange rate overshooting. We show analytically that delayed overshooting is a consequence of heterogeneity in nominal price rigidities. Immediately after a contractionary monetary shock, the reaction of firms with relatively flexible prices generates a strong response of inflation, alongside a currency appreciation. Overtime, as firms with relatively less flexible prices adjust, the appreciation continues, but is subsequently followed by a depreciation. In a calibrated version of the model, with heterogeneity in price rigidity matched with micro-evidence, the peak response of the nominal exchange rate to a monetary policy shock occurs at around 4 quarters.
Item Type: | Article |
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Date Type: | Publication |
Status: | Published |
Schools: | Business (Including Economics) |
Publisher: | Elsevier |
ISSN: | 0261-5606 |
Date of First Compliant Deposit: | 18 March 2024 |
Date of Acceptance: | 17 March 2017 |
Last Modified: | 19 Mar 2024 13:56 |
URI: | https://orca.cardiff.ac.uk/id/eprint/167314 |
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