Real exchange rate dynamics in sticky wage models

•Real exchange rates often exhibit hump-shaped responses to macroeconomic shocks.•Sticky wages and prices are contrasted in a New Open Economy Macroeconomics framework.•Shocks to an interest rate rule, TFP and government spending are considered.•Only fiscal policy generates a hump-shaped response in the sticky wage framework.•Consideration of sticky wages is therefore important in the open economy setting.

We investigate the role of sticky wages in accounting for real exchange rate dynamics. Unlike the sticky price economy, government spending shocks play a more important role than technology shocks in explaining the hump-shaped impulse responses of real exchange rates.