Nominal Exchange Rate

Stochastic simulations
1

Hi,

I am working on a two country models where everything I have is in real terms and we have not defined the nominal exchange rate (e_t). However, I want to plot the nominal exchange rate as well for the IRFs comparison of different versions of my model.
For this, I’ll have to calculate e_t using real exchange rate, home inflation and foreign inflation.
Could anyone please help me how I can do that after the simulations?

Thank you in anticipation.

Best Regards
Martin

2

If I understand your question correctly, you already have inflation in your model so it is not purely real. The nominal exchange rate will generally be I(1) so in reality you’ll want to plot Delta e(t), and then just add the uncovered interest parity equation.

3

Exactly, starting from the definition of the nominal exchange rate as the real exchange rate multiplied by a a ration of prices, the change in the percentage change in the nominal exchange rate can be constructed as the sum of the change in the real exchange rate and the difference in inflation rates.