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Do Relative Prices of Non-traded Goods Determine Long-Run Real Exchange Rates?

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  • Stephen B. DeLoach

Abstract

In this paper, the long-run assumptions of so-called equilibrium models of real exchange rates are investigated. The assumption of purchasing power parity for tradable goods, common to this class of models, implies that the real exchange rate is a function of the relative prices of nontraded goods in the two countries. While purchasing power parity for tradable goods is not directly testable, exploitation of wholesale and consumer prices allows for direct estimation of the reduced form. Cointegration tests are performed for twenty-one bilateral relationships. While much of the evidence is consistent with the predictions of equilibrium models, results are far from conclusive.

Suggested Citation

  • Stephen B. DeLoach, 1997. "Do Relative Prices of Non-traded Goods Determine Long-Run Real Exchange Rates?," Canadian Journal of Economics, Canadian Economics Association, vol. 30(4), pages 891-909, November.
    • Handle: RePEc:cje:issued:v:30:y:1997:i:4:p:891-909
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    Cited by:

    1. Vikas Kakkar, 2003. "The Relative Price of Nontraded Goods and Sectoral Total Factor Productivity: An Empirical Investigation," The Review of Economics and Statistics, MIT Press, vol. 85(2), pages 444-452, May.
    2. Maurice Obstfeld, 2009. "Time of Troubles: The Yen and Japan's Economy, 1985-2008," NBER Working Papers 14816, National Bureau of Economic Research, Inc.
    3. Charalambos Pattichis & Mona Kanaan, 2004. "The Balassa-Samuelson Hypothesis and Oil Price Shocks in a Small Open Economy: Evidence from Cyprus," Open Economies Review, Springer, vol. 15(1), pages 45-56, January.
    4. Kakkar, Vikas, 2001. "Long run real exchange rates: evidence from Mexico," Economics Letters, Elsevier, vol. 72(1), pages 79-85, July.
    5. Vikas Kakkar & Isabel Yan, 2012. "Real Exchange Rates and Productivity: Evidence from Asia," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44, pages 301-322, March.
    6. Heejoon Kang, 1999. "The Applied Cointegration Analysis for the Open Economy: A Critical Review," Open Economies Review, Springer, vol. 10(3), pages 325-346, July.

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