We investigate the role of sticky wages in accounting for real exchange rate dynamics. Unlike the sticky price economy, government spending shocks play a more important role than technology shocks in explaining the hump-shaped impulse responses of real exchange rates.

This paper introduces a bubbly asset into the Matsuyama (2007) model with credit market imperfections and multiple technologies and shows that there can exist multiple bubbly steady states and bubbles may cause underdevelopment traps by preventing the adoption of high productivity technology.

The lag selection procedure based on the final prediction error (FPE) is investigated when the additive structure is a priori known in the nonparametric autoregression. The consistency of the lag selection is proved, followed by the finite sample simulation results.