Real exchange rate persistence and monetary policy rules

The objective of this paper is to analyze the effects of alternative monetary rules on realexchange rate persistence. Using a two-country stochastic dynamic general equilibrium withnominal price stickiness and local currency pricing, we will show how the persistence ofpurchasing power parity deviations can be related to a monetary theory of these deviations.When monetary policy lean against the wind, there is no relationship of proportionalitybetween the time during which prices remain sticky and the persistence of the response of thereal exchange rate: in this case high nominal price rigidity is not sufficient, per se, in generatingany persistence following a monetary shock. Moreover, we emphasize the role of interest ratessmoothing policies and relative price stickiness within countries in understanding therelationshipbetween the real exchange rate and monetary shocks. With reasonable parametersvalues, a wide range of monetary policy rules can generate real exchange rate autocorrelationsaround the ones observed in the data.[...]