Can a pure Real Business Cycle Model explain the real exchange rate?

This paper establishes the ability of a Real Business Cycle model to account for real exchange rate behaviour, using UK data. We show that a productivity simulation is capable of explaining initial real appreciation with subsequent depreciation to a lower steady state. The model is tested by the method of indirect inference, bootstrapping the errors to generate 95% con…dence limits for a time- series representation of the real exchange rate, as well as for various key data moments. The results suggest RBC models can explain real exchange rate movements.