Comment on “Accounting for persistence andvolatility of good-level real exchange rates:
the role of sticky information”
by Crucini, Shintani, and Tsuruga

Eiji Fujii
University of Tsukuba
December 2007

The essence of the paper• Extend the latest work by Kehoe and Midrigan(2007)• Add information stickiness (Mankiw and Reis2002) to price stickiness (Calvo 1983)• Shows that the “dual stickiness” has asubstantial advantage over the conventional
sticky price model in generating the persistence
and volatility in individual goods-based realexchange rates

Overall impression• A very important issue in the field: the wellknown puzzling dynamics of real exchange
rates• Effectively exploits a rich micro panel dataset• Conducted with much technical rigor• Data are micro and detailed, the issue is at theheart of macroeconomics (Awesome!)• Overall, a highly sophisticated piece ofresearchContributions• Offers a micro econometric perspective to theongoing efforts to understand the puzzling
dynamics of real exchange rates• Addresses the real exchange rate issue while
placing it in the larger context ofmacroeconomic rigidity literature• Explicitly derives implications of informationstickiness• Bring different strands of literature together

Are the findings striking?
• Well,… not so much. Just like Calvo model
introduces stickiness in prices, the current
model introduces an additional sources ofrigidity in an ad hoc fashion• With the additional source of rigidity, themodel should do at least as good as andperhaps better than the Calvo modelWhy are the findings not so striking?
• In principle, one can generate certain types of
price dynamics by devising various ad-hoc
mechanisms in the underlying model tocalibrate• Thus, being able to generate persistence andvolatility is interesting, but not sufficient• A critical question is whether or not thepersistence and volatility are generated by anempirically relevant and plausible framework

What the paper demonstrates• The traditional sticky price model is notcapable of generating the same level of
persistence and volatility in individual goodsbased real exchange rates as we observe• Introducing the information stickiness leads tosubstantial improvement in the modelperformanceWhat the paper does not demonstrate• Whether or not the assumptions andrestrictions necessary to generate persistence
and volatility are empirically plausible• Whether or not other model implications (thanthe ones highlighted as the main results) areplausible• Thus, overall relevance of the results to theempirics remains unclear• Some concrete issues follow

Issue 1: Real exchange rate
and relative consumption• From (16) and footnote 4,
Δqt = Δct − Δct*
• This implies that Δq and (Δc- Δc*) share thesame order of persistence and volatility• However, my calculation for 1990-2004 datayieldsvar(Δq )tvar(Δct − Δc )*t

≈ 25.1Issue 2: Nominal exchange rate
and relative money• From (17) and footnote 4,
Δst = Δmt − Δmt*
• This implies that Δs and (Δm- Δm*) sharethe same order of persistence and volatility• Yet, my calculation for 1990-2005 datasuggestsvar(Δs )tvar(Δmt − Δm )*t

≈ 0.30Issue 3: Dynamics of money growth• The main results critically hinges on theassumption that money growth follows AR(1)process with a common parameter• But this is an empirical issue• In fitting various ARMA models, I find
M1, M2 M1s.a. M2s.a.
USAAR(12) AR(6) AR(6)CanadaAR(12) AR(3) AR(2)Issue 3: Dynamics of money growth• Another implication arising from theassumption is that the persistence andvolatility of the real exchange rates must be
monetary-regime specific• This warrants additional analyses on regime
shifts in both money growth and realexchange rate dynamics

Issue 4: ARMA structure restriction• The same ARMA(4,2) structure is imposed on
all of the individual goods-based real exchange
rate series• But the temporal dynamics of the individualgoods prices needs to be verified empirically• My experience with different price dataset
suggest that there is sufficient heterogeneity inthe temporal structures across goods

Suggestions• To enhance the credibility of the current results,– Test and report empirical validity of the key
assumptions– Check and discuss plausibility of other model
implications• These should be very helpful for thinking aboutstrength and weakness of the model• Even if they turn out to be implausible, that isstill quite informative and educating to readers