Trade Costs and Real Exchange Rate Volatility
AbstractThis paper examines the impact of trade costs on real exchange rate volatility. We incorporate a multi-country Ricardian model of trade, based on the work of Eaton and Kortum (2002), into a macroeconomic model to show how bilateral real exchange rate volatility depends on relative technological differences and trade costs. These differences highlight a new channel, in which the similarity of a pair of countries'' set of suppliers of traded goods affects bilateral exchange rate volatility. We then test the importance of this channel using a large panel of cross-country data over 1970-97, and find strong evidence supporting the channel.
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Bibliographic InfoPaper provided by International Monetary Fund in its series IMF Working Papers with number 05/5.
Date of creation: 01 Jan 2005
Date of revision:
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Other versions of this item:
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
- F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-10-22 (All new papers)
- NEP-FIN-2005-10-22 (Finance)
- NEP-IFN-2005-10-22 (International Finance)
- NEP-INT-2005-10-22 (International Trade)
- NEP-PBE-2005-10-26 (Public Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Kanda Naknoi, 2005. "Real Exchange Rate Fluctuations and Endogenous Tradability," 2005 Meeting Papers 857, Society for Economic Dynamics.
- M. Ayhan Kose & Roberto Cardarelli, 2004. "Economic Integration, Business Cycle, and Productivity in North America," IMF Working Papers 04/138, International Monetary Fund.
- Yin-Wong Cheung & Kon S. Lai, 2009.
"A Multiple-Horizon Search for the Role of Trade and Financial Factors in Bilateral Real Exchange Rate Volatility,"
Journal of Economics and Management,
College of Business, Feng Chia University, Taiwan, vol. 5(2), pages 187-218, July.
- Yin-Wong Cheung & Kon S. Lai, 2009. "A Multiple-Horizon Search for the Role of Trade and Financial Factors in Bilateral Real Exchange Rate Volatility," Working Papers 212009, Hong Kong Institute for Monetary Research.
- Michael Bleaney & Mo Tian, .
"Currency Networks, Bilateral Exchange Rate Volatility and the Role of the US Dollar,"
11/06, University of Nottingham, School of Economics.
- Michael Bleaney & Mo Tian, 2012. "Currency Networks, Bilateral Exchange Rate Volatility and the Role of the US Dollar," Open Economies Review, Springer, vol. 23(5), pages 785-803, November.
- Claudio Bravo-Ortega & Julian di Giovanni, 2006.
"Remoteness and Real Exchange Rate Volatility,"
IMF Staff Papers,
Palgrave Macmillan, vol. 53(si), pages 6.
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