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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 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 long-run variance of 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 National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14834.

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Date of creation: Apr 2009
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Handle: RePEc:nbr:nberwo:14834

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  1. Mario J. Crucini & Chris I. Telmer & Marios Zachariadis, 2005. "Understanding European Real Exchange Rates," American Economic Review, American Economic Association, American Economic Association, vol. 95(3), pages 724-738, June.
  2. Long, John B, Jr & Plosser, Charles I, 1983. "Real Business Cycles," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 91(1), pages 39-69, February.
  3. Ariel T. Burstein & Joao C. Neves & Sergio Rebelo, 2000. "Distribution Costs and Real Exchange Rate Dynamics During Exchange-Rate-Based Stabilizations," RCER Working Papers 473, University of Rochester - Center for Economic Research (RCER).
  4. Alvarez, Fernando & Lucas, Robert Jr., 2007. "General equilibrium analysis of the Eaton-Kortum model of international trade," Journal of Monetary Economics, Elsevier, Elsevier, vol. 54(6), pages 1726-1768, September.
  5. Andrew Atkeson & Ariel Burstein, 2007. "Pricing-to-Market in a Ricardian Model of International Trade," NBER Working Papers 12861, National Bureau of Economic Research, Inc.
  6. Kanda Naknoi, 2005. "Real exchange rate fluctuations, endogenous tradability and exchange rate regime," International Finance, EconWPA 0509004, EconWPA, revised 07 Nov 2005.
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