The role of heterogeneity in price rigidities for delayed nominal exchange rate overshooting

Cooke, Dudley and Kara, Engin ORCID: https://orcid.org/0000-0003-0715-4857 2022. The role of heterogeneity in price rigidities for delayed nominal exchange rate overshooting. Journal of International Money and Finance 120 , 102541. 10.1016/j.jimonfin.2021.102541

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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
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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