Euro-dollar real exchange rate dynamics in an estimated two-country model: An assessment

Pau Rabanal, Vicente Tuesta

Research output: Contribution to journalArticle (Contribution to Journal)peer-review

47 Scopus citations


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 contributionDinámica del tipo de cambio real del euro-dólar en un modelo estimado de dos países
Original languageEnglish
Pages (from-to)780-797
Number of pages18
JournalJournal of Economic Dynamics and Control
Issue number4
StatePublished - Apr 2010
Externally publishedYes


  • Bayesian estimation
  • Model comparison
  • Real exchange rates


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