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The real exchange rate and quality improvements

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  • Karen Dury
  • Özlem Oomen
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    Abstract

    This paper studies how the real exchange rate might respond to product innovation (improvements in the quality of goods) as opposed to process innovation (increased efficiency in the production of goods). We develop a two-country dynamic stochastic general equilibrium model, where quality improvements affect both the demand and the supply side of the economy. We show that the real exchange rate defined in terms of prices per quality unit (quality-adjusted prices) does not always move in the same direction as that defined in terms unit prices (quality-unadjusted prices), illustrating the importance of measuring quality correctly.

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    File URL: http://www.bankofengland.co.uk/research/Documents/workingpapers/2007/WP320.pdf
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    Bibliographic Info

    Paper provided by Bank of England in its series Bank of England working papers with number 320.

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    Date of creation: Apr 2007
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    Handle: RePEc:boe:boeewp:320

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    1. Bart Hobijn, 2002. "On both sides of the quality bias in price indexes," Staff Reports 157, Federal Reserve Bank of New York.
    2. Amy Jocelyn Glass, 2001. "Price discrimination and quality improvement," Canadian Journal of Economics, Canadian Economics Association, vol. 34(2), pages 549-569, May.
    3. Fabio Ghironi, 2002. "Endogenously persistent output dynamics: A puzzle for the sticky-price model?," Boston College Working Papers in Economics 527, Boston College Department of Economics.
    4. Fabio Ghironi & Marc J. Melitz, 2004. "International Trade and Macroeconomic Dynamics with Heterogeneous Firms," Boston College Working Papers in Economics 599, Boston College Department of Economics.
    5. Aghion, P. & Howitt, P., 1989. "A Model Of Growth Through Creative Destruction," Working papers 527, Massachusetts Institute of Technology (MIT), Department of Economics.
    6. Grossman, G.M. & Helpman, E., 1989. "Quality Ledders In The Theory Of Growth," Papers 148, Princeton, Woodrow Wilson School - Public and International Affairs.
    7. Krugman, Paul, 1979. "A Model of Innovation, Technology Transfer, and the World Distribution of Income," Journal of Political Economy, University of Chicago Press, vol. 87(2), pages 253-66, April.
    8. Rotemberg, Julio J, 1982. "Monopolistic Price Adjustment and Aggregate Output," Review of Economic Studies, Wiley Blackwell, vol. 49(4), pages 517-31, October.
    9. Aghion, Philippe & Howitt, Peter, 1992. "A Model of Growth Through Creative Destruction," Scholarly Articles 12490578, Harvard University Department of Economics.
    10. Segerstrom, Paul S & Anant, T C A & Dinopoulos, Elias, 1990. "A Schumpeterian Model of the Product Life Cycle," American Economic Review, American Economic Association, vol. 80(5), pages 1077-91, December.
    11. Morten Spange & Pawel Zabczyk, 2006. "Sterling implications of a US current account reversal," Bank of England working papers 296, Bank of England.
    12. Warnock, Francis E., 2003. "Exchange rate dynamics and the welfare effects of monetary policy in a two-country model with home-product bias," Journal of International Money and Finance, Elsevier, vol. 22(3), pages 343-363, June.
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    Cited by:
    1. Bruha, Jan & Podpiera, Jirí, 2011. "The dynamics of economic convergence: The role of alternative investment decisions," Journal of Economic Dynamics and Control, Elsevier, vol. 35(7), pages 1032-1044, July.

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