Several theoretical contributions using two-country models have combined alternative forms of pricing under nominal rigidities with different asset market structures to explain real exchange rate dynamics. We estimate a two-country model using data for the United States and the Euro Area, and study the importance of such alternative assumptions in fitting the data. A model with local currency pricing and incomplete markets does a good job in explaining real exchange rate volatility, and fits the dynamics of domestic variables well. The complete markets assumption delivers a similar fit only when the structure of shocks is rich enough.
|Translated title of the contribution||Dinámica del tipo de cambio real del euro-dólar en un modelo estimado de dos países|
|Number of pages||18|
|Journal||Journal of Economic Dynamics and Control|
|State||Published - Apr 2010|
- Bayesian estimation
- Model comparison
- Real exchange rates