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A model of international cities: implications for real exchange rates

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  • Mario J. Crucini
  • Hakan Yilmazkuday

Abstract

We develop a model of cities each inhabited by two agents, one specializing in manufacturing, the other in retail distribution. The distribution sector represents the physical transformation of all internationally traded goods from the factory gate to the final consumer. Using a panel of micro-prices at the city level, we decompose the cross-sectional variance of long-run LOP deviations into the fraction due to distribution costs, trade costs and a residual. For the median good, trade costs account for 50 percent of the variance, distribution costs account for 10 percent with 40 percent of the variance unexplained. Since the sample of items in the data are heavily skewed toward traded goods, we also decompose the variance based on the median good on an expenditure-weighted basis. Now the tables turn, with distribution costs accounting for 43 percent, trade costs 36 percent and 21 percent of the variance unexplained.

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Paper provided by Federal Reserve Bank of Dallas in its series Globalization and Monetary Policy Institute Working Paper with number 38.

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Date of creation: 2009
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Handle: RePEc:fip:feddgw:38

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Keywords: Foreign exchange ; Pricing;

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  1. Andrew Atkeson & Ariel Burstein, 2007. "Pricing-to-Market in a Ricardian Model of International Trade," American Economic Review, American Economic Association, vol. 97(2), pages 362-367, May.
  2. Mario J. Crucini & Chris I. Telmer & Marios Zachariadis, 2005. "Understanding European Real Exchange Rates," American Economic Review, American Economic Association, vol. 95(3), pages 724-738, June.
  3. Long, John B, Jr & Plosser, Charles I, 1983. "Real Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 91(1), pages 39-69, February.
  4. Naknoi, Kanda, 2008. "Real exchange rate fluctuations, endogenous tradability and exchange rate regimes," Journal of Monetary Economics, Elsevier, vol. 55(3), pages 645-663, April.
  5. Burstein, Ariel Tomas & Neves, Joao C & Rebelo, Sérgio, 2001. "Distribution Costs and Real Exchange Rate Dynamics During Exchange-Rate-Based Stabilization," CEPR Discussion Papers 2944, C.E.P.R. Discussion Papers.
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Cited by:
  1. Philippe Andrade & Marios Zachariadis, 2011. "Global Versus Local Shocks in Micro Price Dynamics," University of Cyprus Working Papers in Economics 10-2011, University of Cyprus Department of Economics.
  2. Mario J. Crucini & Mototsugu Shintani & Takayuki Tsuruga, 2008. "Accounting for Persistence and Volatility of Good-Level Real Exchange Rates: The Role of Sticky Information," Vanderbilt University Department of Economics Working Papers 0810, Vanderbilt University Department of Economics.
  3. Mario J. Crucini & J. Scott Davis, 2013. "Distribution Capital and the Short- and Long-Run Import Demand Elasticity," NBER Working Papers 18753, National Bureau of Economic Research, Inc.
  4. Mario J. Crucini & Hakan Yilmazkuday, 2013. "Understanding Long-run Price Dispersion," NBER Working Papers 18811, National Bureau of Economic Research, Inc.
  5. Yilmazkuday, Hakan, 2009. "Is the Armington Elasticity Really Constant across Importers?," MPRA Paper 15954, University Library of Munich, Germany.
  6. Michael Sposi, 2013. "Trade barriers and the relative price tradables," Globalization and Monetary Policy Institute Working Paper 139, Federal Reserve Bank of Dallas.
  7. Chaban, Maxym, 2011. "Home bias, distribution services and determinants of real exchange rates," Journal of Macroeconomics, Elsevier, vol. 33(4), pages 793-806.
  8. Philippe Andrade & Marios Zachariadis, 2010. "Trends in International Prices," University of Cyprus Working Papers in Economics 02-2010, University of Cyprus Department of Economics.
  9. Giri, Rahul, 2012. "Local costs of distribution, international trade costs and micro evidence on the law of one price," Journal of International Economics, Elsevier, vol. 86(1), pages 82-100.
  10. Hakan Yilmazkuday, 2012. "How wide is the border across U.S. states?," Letters in Spatial and Resource Sciences, Springer, vol. 5(1), pages 25-31, March.

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