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Understanding Real Exchange Rate Movements With Trade In Intermediate Products

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  • David Parsley
  • Helen Popper

Abstract

We suggest that it may be ‘too easy’ to attribute real exchange rate movements to deviations from the law of one price. We show that it is immaterial whether one uses seemingly traded goods, nontraded goods, or even a single, unimportant consumer good, say beer. The ease of attributing the variation to any such deviations is explained using a model with intermediate goods trade. In the model, the stage of production determines the traded/nontraded distinction. We find empirical substantiation for the model: law of one price deviations lose explanatory power and, defined appropriately in terms of intermediate goods, relative prices matter.

Suggested Citation

  • David Parsley & Helen Popper, 2010. "Understanding Real Exchange Rate Movements With Trade In Intermediate Products," Pacific Economic Review, Wiley Blackwell, vol. 15(2), pages 171-188, May.
  • Handle: RePEc:bla:pacecr:v:15:y:2010:i:2:p:171-188
    DOI: 10.1111/j.1468-0106.2010.00496.x
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    Cited by:

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    2. Crucini, Mario J. & Landry, Anthony, 2019. "Accounting for real exchange rates using micro-data," Journal of International Money and Finance, Elsevier, vol. 91(C), pages 86-100.
    3. Emi Nakamura & Dawit Zerom, 2010. "Accounting for Incomplete Pass-Through," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 77(3), pages 1192-1230.
    4. Yin-Wong Cheung & Menzie D. Chinn & Eiji Fujii, 2010. "Measuring Renminbi Misalignment: Where Do We Stand?," Working Papers 242010, Hong Kong Institute for Monetary Research.
    5. Bache, Ida Wolden & Sveen, Tommy & Torstensen, Kjersti Næss, 2013. "Revisiting the importance of non-tradable goods' prices in cyclical real exchange rate fluctuations," European Economic Review, Elsevier, vol. 57(C), pages 98-107.
    6. Waldyr Areosa & Marta Areosa, 2012. "The Signaling Effect of Exchange Rates: pass-through under dispersed information," Working Papers Series 282, Central Bank of Brazil, Research Department.
    7. Mr. Joong S Kang & Wei Liao, 2016. "Chinese Imports: What’s Behind the Slowdown?," IMF Working Papers 2016/106, International Monetary Fund.

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    JEL classification:

    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • F3 - International Economics - - International Finance

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