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Revisiting the importance of non-tradable goods' prices in cyclical real exchange rate fluctuations

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  • Bache, Ida Wolden
  • Sveen, Tommy
  • Torstensen, Kjersti Næss

Abstract

In an influential paper Engel (1999) argues that essentially all the fluctuations in the real exchange rate can be attributed to fluctuations in the relative price of traded goods, and that only a small part of the fluctuations can be attributed to changes in the relative price of non-tradables. We revisit this important issue and our main finding suggests that the relative distribution wedge, i.e. the relationship between traded goods' prices at-the-dock and the retail prices of those goods, is key to understanding real exchange rate fluctuations. Importantly, our results suggest that variations in the relative wedge are driven by fluctuations in mark-ups and not in distribution costs.

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Bibliographic Info

Article provided by Elsevier in its journal European Economic Review.

Volume (Year): 57 (2013)
Issue (Month): C ()
Pages: 98-107

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Handle: RePEc:eee:eecrev:v:57:y:2013:i:c:p:98-107

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Web page: http://www.elsevier.com/locate/eer

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Keywords: Real exchange rates;

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Cited by:
  1. P. Jacob, 2010. "Disaggregating Real Exchange Rate Dynamics: A Structural Approach," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 10/655, Ghent University, Faculty of Economics and Business Administration.

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