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The real exchange rate as the relative price of nontradables in terms of tradables: theoretical investigation and empirical study on French data

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Author Info

  • C. ALLARD-PRIGENT

    (Insee)

  • H. GUILMEAU

    (Ensae)

  • A. QUINET

    (Direction de la Prévision)

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    Abstract

    Large 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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    File URL: http://www.insee.fr/en/publications-et-services/docs_doc_travail/G2000-02.pdf
    File Function: Document de travail de la DESE numéro G2000-02
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    Bibliographic Info

    Paper 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.

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    Date of creation: 2000
    Date of revision:
    Handle: RePEc:crs:wpdeee:g2000-02

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    Related research

    Keywords: Productivity; Real Exchange Rate; Sectoral Inflation; Public Spending; Cointegration Relationship;

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    Cited by:
    1. 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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