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Goods market arbitrage and real exchange rate volatility

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  • Lee, Inkoo

Abstract

This paper studies the economic determinants of real exchange rate volatility within a goods market arbitrage framework. We show that high volatility of the real exchange rate can be explained by relevant real factors such as trade costs, output ratio volatility and intertemporal elasticity of substitution. We also provide empirical evidence to support our model's predictions for real exchange rate volatility. We view our framework as complementary to those that emphasize the role of sticky prices.

Suggested Citation

  • Lee, Inkoo, 2008. "Goods market arbitrage and real exchange rate volatility," Journal of Macroeconomics, Elsevier, vol. 30(3), pages 1029-1042, September.
    • Handle: RePEc:eee:jmacro:v:30:y:2008:i:3:p:1029-1042
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    References listed on IDEAS

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    1. Mario J. Crucini & Chris I. Telmer & Marios Zachariadis, 2005. "Understanding European Real Exchange Rates," American Economic Review, American Economic Association, vol. 95(3), pages 724-738, June.
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    Cited by:

    1. Lee, Inkoo, 2010. "Geographic price dispersion in retail markets: Evidence from micro-data," Journal of Macroeconomics, Elsevier, vol. 32(4), pages 1169-1177, December.
    2. Samba Mbaye, 2012. "Real Exchange Rate Undervaluation and Growth: Is there a Total Factor Productivity Growth Channel?," CERDI Working papers halshs-00687948, HAL.
    3. Pippenger, John, 2015. "Arbitrage and the Law of One Price: Setting the Record Straight," University of California at Santa Barbara, Economics Working Paper Series qt27t4q265, Department of Economics, UC Santa Barbara.

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