The Research Of RER Stochastic Dynamic Volatility

This paper develops a stochastic dynamic general equilibrium model to explain variance decompositions of real exchange rates. According to industry difference, we classify Real Exchange Rate into Traded Real Exchange Rate and Non-traded Real Exchange Rate. Then this paper examines, empirically and theoretically, the two different decomposition of the volatility of real exchange rates. For the purpose of this decomposition, goods are classified as being traded or non-traded in international markets. The first part of my paper mainly states the current study of endogenous tradability, the methods used in this paper and difficulty and innovation. The second part performs an empirical analysis for a broad cross section of countries by the means of Baxter-King (1999) band-pass filter. The result tell us The relative price of non-traded goods to traded goods is found to be relatively more important in movements of real exchange rates of the country pairs that maintain stable nominal exchange rates. The paper goes on to construct a model with endogenous tradability to suggest an explanation for the evidence.Its key features are trade costs, heterogeneous productivity and sticky wages. Dynamics of comparative advantage amplify the expenditure switching. The non-traded sector arises from non-zero trade costs. The relative price of goods depends on productivity, transport costs, and in the short run, on the exchange rate regime. The model predicts that importance of the relative price of traded goods is increasing in the covariance between terms of trade and productivity differentials in the non-traded and export sectors. Given interest rate shocks, exchange rate stability reduces the covariance and importance of the relative price of the traded goods. Total factor productivity shocks raise the covariance and cause the relative price of traded goods to drive real exchange rates, regardless of exchange rate regimes. In the forth part, the calibration shows that the relative price of non-traded and traded goods makes a much greater contribution to overall real exchange rate volatility under a fixed exchange rate regime than a flexible regime, as in the data. At the last part, I will give my review and prospect to the theory and practical analysis of non-traded Real Exchange Rate volatility...