A Note on Real Exchange Rate Dynamics and the Taylor Rule

In their recent article, Kehoe and Midrigan (2007) derive an AR(1) representation for the real exchange rate. Their model implies that the persistence parameter of the real exchange rate equals a measure of price-stickiness in Calvo-pricing models under fairly general assumptions. This note demonstrates that such a representation can be consistent with a model where the money supply is endogenously determined by the Taylor Rule along the line of Woodford (2007)