# name
Revisiting real exchange rate volatility: Non-traded goods and cointegrated tfp Chockse [WP]

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International real business cycle (IRBC) models predict a real exchange rate volatility that is much lower than the levels observed in the data. In this paper, we build a two-country IRBC model with both a traded and a non-traded goods sector, and calibrate it to UK-euro area (EA) data. We provide evidence on the existence of a cointegrating relationship between UK and EA traded sector total factor productivity (TFP) by estimating a vector error correction model (VECM). To account for this relationship, we incorporate non-stationary technology shocks in the traded sectors in our model, and show that then the model is able to match the observed volatility of the UK-EA real exchange rate. Our analysis points out that both the presence of non-traded sectors and non-stationary technology shocks are necessary to account for the observed volatility in the real exchange rate.

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Universitat de Barcelona. Facultat d'Economia i Empresa

# metadata.dc.relation.ispartof[].value
UB Economics – Working Papers, 2018, E18/375

# metadata.dc.title[].value
Revisiting real exchange rate volatility: Non-traded goods and cointegrated tfp Chockse [WP]