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

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  • Ida Wolden Bache

    (Norges Bank (Central Bank of Norway))

  • Kjersti Næss

    ()
    (Norges Bank (Central Bank of Norway))

  • Tommy Sveen

    ()
    (Norges Bank (Central Bank of Norway))

Abstract

In an influential paper Engel (1999. Accounting for U.S. Real Exchange Rate Changes, Journal of Political Economy 107, 507-538) argues that essentially all the flctuations 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 instead decompose the real exchange rate into three components: the relative price of traded goods at-the-dock, the difference in the relative price of non-traded to traded goods and the difference in the wedge between retail prices of traded goods and the prices of traded goods at-the-dock. Using data on US bilateral real exchange rates we find that the fluctuations in the relative wedge between retail prices and traded goods prices at-the-dock account for on average between 30 and 70 percent of the movements in the real exchange rate. These findings suggest that the relationship between traded goods prices at-the-dock and retail prices of traded goods is key to understanding real exchange rate fluctuations.

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File URL: http://www.norges-bank.no/en/Published/Papers/Working-Papers/2009/WP-20093/
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Bibliographic Info

Paper provided by Norges Bank in its series Working Paper with number 2009/03.

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Length: 17 pages
Date of creation: 30 Jan 2009
Date of revision:
Handle: RePEc:bno:worpap:2009_03

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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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