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Analyzing aggregate real exchange rate persistence through the lens of sectoral data

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  • Laura Mayoral
  • Maréa Dolores Gadea

Abstract

In this paper we analyze the persistence of aggregate real exchange rates (RERs) for a group of EU-15 countries by using sectoral data. The tight relation between aggregate and sectoral persistence recently investigated by Mayoral (2008) allows us to decompose aggregate RER persistence into the persistence of its different subcomponents. We show that the distribution of sectoral persistence is highly heterogeneous and very skewed to the right, and that a limited number of sectors are responsible for the high levels of persistence observed at the aggregate level. We use quantile regression to investigate whether the traditional theories proposed to account for the slow reversion to parity (lack of arbitrage due to nontradibilities or imperfect competition and price stickiness) are able to explain the behavior of the upper quantiles of sectoral persistence. We conclude that pricing to market in the intermediate goods sector together with price stickiness have more explanatory power than variables related to the tradability of the goods or their inputs.

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Bibliographic Info

Paper provided by Barcelona Graduate School of Economics in its series Working Papers with number 399.

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Date of creation: Aug 2009
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Handle: RePEc:bge:wpaper:399

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Related research

Keywords: PPP puzzle; real exchange rates; persistence; heterogeneous dynamics; aggregation bias; nontradability; imperfect competition; pricing-to-market;

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Cited by:
  1. Carlos Carvalho & Fernanda Nechio, 2011. "Aggregation and the PPP Puzzle in a Sticky-Price Model," American Economic Review, American Economic Association, American Economic Association, vol. 101(6), pages 2391-2424, October.

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