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U.S. real exchange rate fluctuations and relative price fluctuations Author info | Abstract | Publisher info | Download info | Related research | Statistics Caroline M. Betts
Timothy J. Kehoe
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This paper studies the relation between the United States’ bilateral real exchange rate and the associated bilateral relative price of nontraded goods for five of its most important trade relationships. Traditional theory attributes fluctuations in real exchange rates to changes in the relative price of nontraded goods. We find that this relation depends crucially on the choice of price series used to measure relative prices and on the choice of trade partner. The relation is stronger when we measure relative prices using producer prices rather than consumer prices. The relation is stronger the more important is the trade relationship between the United States and a trade partner. Even in cases where there is a strong relation between the real exchange rate and the relative price of nontraded goods, however, a large fraction of real exchange rate fluctuations is due to deviations from the law of one price for traded goods.
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Paper provided by Federal Reserve Bank of Minneapolis in its series Staff Report with number
334.
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Date of creation: 2004Date of revision:
Handle: RePEc:fip:fedmsr:334Contact details of provider: Postal: 90 Hennepin Avenue, P.O. Box 291, Minneapolis, MN 55480-0291 Phone: (612) 204-5000 Web page: http://minneapolisfed.org/ More information through EDIRC
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