Since the breakdown of the Bretton Woods system of managed exchange rates in the early 1970's, there have been large and persistent movements in the nominal exchange rates between the currencies of the United States, Japan, and the countries of Western Europe. These movements in nominal exchange rates have been much larger than the inflation, money growth, or interest rate differentials across these countries. Moreover, at all but very low frequencies, these movements in nominal exchange rates are associated with movements in real exchange rates of roughly the same size and persistence. The purpose of this research is to develop new approaches to modeling this behavior of exchange rates and their impact on international business cycles. The project consists of three parts. The first involves analyzing whether a model used to assess the impact of monetary injections on asset prices can reproduce the salient features of exchange rate behavior. The second part involves analyzing the impact of monetary policy on interest rates, exchange rates, the terms of trade, and the trade balance using an international business cycle model with segmented asset markets. The third part develops a search model to analyze the pricing decisions of multinational firms that produce in a single location and sell their products to segmented goods markets.
