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Felipe Saffie – Darden – Brown Bag Series
8 October 2020 @ 1:45 pm - 2:45 pm
Nils Gornemann, Pablo Guerron-Quintana, and Felipe Saffie
September 15, 2020
Real exchange rates (RERs) display sizable fluctuations not only over the business cycle,but also at lower frequencies, resulting in large and persistent swings over decades—facts that many business cycle models struggle to match. We propose an international macroeconomics model with endogenous productivity to rationalize these facts. In the model, endogenous growth amplifies stationary fluctuations generating persistent productivity differences between countries that trigger low-frequency cycles in the RER. The estimated model effortlessly replicates the empirical spectrum, auto correlation, and half-life of the RER. In addition, we document that low frequency movements in aggregate trade flows are crucial to discipline the RER cycles. Finally,we validate the model-implied co-movement between relative prices and technology differentials using a panel of cross industry-country data on patent and industry prices.