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Nontradable Goods and the Real Exchange Rate

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  • Pau Rabanal

    ()

  • Vicente Tuesta

    ()

Abstract

How important are nontradable goods and distribution costs to explain real exchange rate dynamics? We answer this question by estimating a general equilibrium model with intermediate and final tradable and nontradable goods. We find that the estimated model can match characteristics of the data that are relevant in international macroeconomics, such as real exchange rate persistence and volatility, and the correlation between the real exchange rate and other variables. The distinction between tradable and nontradable goods is key to understand real exchange rate fluctuations, but the introduction of distribution costs is not. Nontradable sector technology shocks explain about one third of real exchange rate volatility. We also show that, in order to explain the low correlation between the ratio of relative consumption and the real exchange rates across countries, demand shocks are necessary. Copyright Springer Science+Business Media New York 2013

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Bibliographic Info

Article provided by Springer in its journal Open Economies Review.

Volume (Year): 24 (2013)
Issue (Month): 3 (July)
Pages: 495-535

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Handle: RePEc:kap:openec:v:24:y:2013:i:3:p:495-535

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Web page: http://www.springerlink.com/link.asp?id=100323

Related research

Keywords: Real exchange rates; Nontradable goods; Nominal rigidities; Bayesian estimation; F31; F32; F41; C11;

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References

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  1. Betts, Caroline M. & Kehoe, Timothy J., 2006. "U.S. real exchange rate fluctuations and relative price fluctuations," Journal of Monetary Economics, Elsevier, Elsevier, vol. 53(7), pages 1297-1326, October.
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  3. Federico Mandelman & Pau Rabanal & Juan Francisco Rubio-Ramirez & Diego Vilan, 2011. "Investment Specific Technology Shocks and International Business Cycles: An Empirical Assessment," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(1), pages 136-155, January.
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  7. Alan C. Stockman & Linda L. Tesar, 1991. "Tastes and technology in a two-country model of the business cycle: explaining international co-movements," Working Paper 9019, Federal Reserve Bank of Cleveland.
  8. Alejandro Justiniano & Bruce Preston, 2006. "Can Structural Small Open Economy Models Account for the Influence of Foreign Disturbances?," 2006 Meeting Papers, Society for Economic Dynamics 479, Society for Economic Dynamics.
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  11. Giancarlo CORSETTI & Luca DEDOLA & Sylvain LEDUC, 2003. "International Risk-Sharing and the Transmission of Productivity Shocks," Economics Working Papers ECO2003/22, European University Institute.
  12. Rabanal, Pau & Tuesta, Vicente, 2010. "Euro-dollar real exchange rate dynamics in an estimated two-country model: An assessment," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 34(4), pages 780-797, April.
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Citations

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Cited by:
  1. Pau Rabanal & Juan Francisco Rubio-Ramirez & Vicente Tuesta Reátegui, 2010. "Cointegrated TFP Processes and International Business Cycles," Working Papers, Duke University, Department of Economics 10-11, Duke University, Department of Economics.
  2. Michał Gradzewicz & Krzysztof Makarski, 2009. "The Macroeconomic Effects of Losing Autonomous Monetary Policy after the Euro Adoption in Poland," National Bank of Poland Working Papers 58, National Bank of Poland, Economic Institute.
  3. Riccardo Cristadoro & Andrea Gerali & Stefano Neri & Massimiliano Pisani, 2008. "Real exchange rate volatility and disconnect: an empirical investigation," Temi di discussione (Economic working papers), Bank of Italy, Economic Research and International Relations Area 660, Bank of Italy, Economic Research and International Relations Area.

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