The literature on real exchange rate fluctuations is precisely divided by the views regarding their source. One emphasizes the relative price of nontraded goods to traded goods by assuming nominal rigidities in the nontraded sector or in the factor prices. The other stresses the importance of the traded component or the deviations from the law of one price. In this paper, we use Betts and Kehoe (2001)'s real exchange rate decomposition to explore which component accounts for the bilateral real exchange rate fluctuations among six East Asian countries and the United States. We find that a significant fraction of the variance of real exchange rates is accounted for by the deviations from the law of one price for traded goods, while the relative price of nontraded to traded goods also plays an important role as nominal exchange rate becomes stable.
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Paper provided by Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University in its series CEI Working Paper Series with number
2004-22.
Length: 19 p. Date of creation: Mar 2005 Date of revision: Handle: RePEc:hit:hitcei:2004-22
Note: December 31, 2004, Paper prepared for PRI-KIEP Seminar held in Tokyo on 2-3 December 2004 Contact details of provider: Postal: 2-1 Naka, Kunitachi, Tokyo 186-8603 Phone: 042-580-8405 Fax: 042-580-8333 Email: Web page: http://cei.ier.hit-u.ac.jp/ More information through EDIRC
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