The real exchange rate as the relative price of nontradables in terms of tradables: theoretical investigation and empirical study on French data
AbstractLarge fluctuations in both nominal and real parities between G7 countries raise the issue of their determinants. This paper offers a formal description of a model of the real exchange rate, defined as the relative price of nontradables in terms of tradables, explicitly based on microeconomic optimization. Our approach relies on a version of the general equilibrium model first presented by Obsfeld-Rogoff (1996). But we enrich the model by introducing monopolistic competition in the nontradables sector. This allows for demand factors to influence the real exchange rate in the long run. Our results on French data do not corroborate the Obsfeld-Rogoff supply-side model. However, they provide some support for the extended version of the model: a cointegration relationship can be found between the real exchange rate, sectoral productivities and the « world » real interest rate, once public expenditure is also taken into account.
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Bibliographic InfoPaper provided by Institut National de la Statistique et des Etudes Economiques, DESE in its series Documents de Travail de la DESE - Working Papers of the DESE with number g2000-02.
Date of creation: 2000
Date of revision:
Productivity; Real Exchange Rate; Sectoral Inflation; Public Spending; Cointegration Relationship;
Find related papers by JEL classification:
- D40 - Microeconomics - - Market Structure and Pricing - - - General
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
- O33 - Economic Development, Technological Change, and Growth - - Technological Change; Research and Development; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
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- Nanno Mulder & Anne-Laure Baldi, 2004. "The Impact of Exchange Rate Regimes on Real Exchange Rates: ABC and Mexico in the 1990s," Econometric Society 2004 Latin American Meetings 45, Econometric Society.
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