“Cointegrated TFP Processes and International Business Cycles” by Pau Rabanal
International Monetary Fund
Juan F. Rubio-Ramírez
Central Reserve Bank of Peru
A puzzle in international macroeconomics is that observed real exchange rates are highly volatile. Standard international real business cycle (IRBC) models cannot re- produce this fact. We show that TFP processes for the U.S. and the "rest of the world" is characterized by a vector error correction (VECM) and that adding cointegrated technology shocks to the standard IRBC model helps explaining the observed high real exchange rate volatility. Also, we show that the observed increase of the real exchange rate volatility with respect to output in the last 20 years can be explained by changes in the parameter of the VECM.