English, Article, Journal or magazine article edition: The Lucas critique and the stability of empirical models Thomas A. Lubik; Paolo Surico

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Bookmark: http://trove.nla.gov.au/version/74472
Physical Description
  • preprint
Language
  • English

Edition details

Title
  • The Lucas critique and the stability of empirical models
Author
  • Thomas A. Lubik
  • Paolo Surico
Physical Description
  • preprint
Notes
  • Empirical evidence suggests that movements in international relative prices (such as the real exchange rate) are large and persistent. Nontraded goods, both in the form of final consumption goods and as an input into the production of final tradable goods, are an important aspect behind international relative price movements. In this paper we show that nontraded goods have important implications for exchange rate behavior, even though fluctuations in the relative price of nontraded goods account for a relatively small fraction of real exchange rate movements. In our quantitative study nontraded goods magnify the volatility of exchange rates when compared to the model without nontraded goods. Cross-country correlations and the correlation of exchange rates with other macro variables are closer in line with the data. In addition, contrary to a large literature,standard alternative assumptions about the currency in which firms price their goods are virtually inconsequential for the properties of aggregate variables in our model, other than the terms of trade.
  • Monetary policy ; Econometric models
  • RePEc:fip:fedrwp:06-05
Language
  • English
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