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Accounting for Real Exchange Rates Using Micro-data

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  • Mario J. Crucini
  • Anthony Landry

Abstract

The classical dichotomy predicts that all of the time series variance in the aggregate real exchange rate is accounted for by non-traded goods in the CPI basket because traded goods obey the Law of One Price. In stark contrast, Engel (1999) found that traded goods had comparable volatility to the aggregate real exchange rate. Our work reconciles these two views by successfully applying the classical dichotomy at the level of intermediate inputs into the production of final goods using highly disaggregated retail price data. Since the typical good found in the CPI basket is about equal parts traded and non-traded inputs, we conclude that the classical dichotomy applied to intermediate inputs restores its conceptual value.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17812.

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Date of creation: Feb 2012
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Handle: RePEc:nbr:nberwo:17812

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  1. Burstein, Ariel Tomas & Neves, Joao C & Rebelo, Sérgio, 2001. "Distribution Costs and Real Exchange Rate Dynamics During Exchange-Rate-Based Stabilization," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2944, C.E.P.R. Discussion Papers.
  2. Parsley, David & Popper, Helen, 2009. "Understanding Real Exchange Rate Movements with Trade in Intermediate Products," MPRA Paper 21117, University Library of Munich, Germany.
  3. Mario Crucini & Chris Telmer & Marios Zachariadis, . "Understanding European Real Exchange Rates," GSIA Working Papers, Carnegie Mellon University, Tepper School of Business 227, Carnegie Mellon University, Tepper School of Business.
  4. Caroline M. Betts & Timothy J. Kehoe, 2005. "U.S. Real Exchange Rate Fluctuations and Relative Price Fluctuations," IEPR Working Papers, Institute of Economic Policy Research (IEPR) 05.16, Institute of Economic Policy Research (IEPR).
  5. Burstein, Ariel Tomas & Eichenbaum, Martin & Rebelo, Sérgio, 2004. "Large Devaluations and the Real Exchange Rate," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4810, C.E.P.R. Discussion Papers.
  6. Charles Engel & John H. Rogers, 1994. "How Wide is the Border?," NBER Working Papers 4829, National Bureau of Economic Research, Inc.
  7. José Manuel Campa & Linda S. Goldberg, 2005. "Exchange Rate Pass-Through into Import Prices," The Review of Economics and Statistics, MIT Press, vol. 87(4), pages 679-690, November.
  8. T. W.Swan, 1960. "Economic Control In A Dependent Economy," The Economic Record, The Economic Society of Australia, The Economic Society of Australia, vol. 36(73), pages 51-66, 03.
  9. W. E. G. Salter, 1959. "Internal And External Balance: The Role Op Price And Expenditure Effects," The Economic Record, The Economic Society of Australia, The Economic Society of Australia, vol. 35(71), pages 226-238, 08.
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Cited by:
  1. Ikeno, Hidehiro, 2014. "Pairwise tests of convergence of Japanese local price levels," International Review of Economics & Finance, Elsevier, Elsevier, vol. 31(C), pages 232-248.
  2. Mario J. Crucini & Hakan Yilmazkuday, 2013. "Understanding Long-run Price Dispersion," CAMA Working Papers 2013-57, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  3. Giancarlo Corsetti & Luca Dedola & Francesca Viani, 2011. "Traded and Nontraded Goods Prices, and International Risk Sharing: an Empirical Investigation," NBER Working Papers 17501, National Bureau of Economic Research, Inc.
  4. Mario J. Crucini & J. Scott Davis, 2013. "Distribution capital and the short- and long-run import demand elasticity," Globalization and Monetary Policy Institute Working Paper, Federal Reserve Bank of Dallas 137, Federal Reserve Bank of Dallas.
  5. Anthony Landry & Marianne Baxter, 2013. "IKEA: Product, Pricing, and Pass-Through," 2013 Meeting Papers, Society for Economic Dynamics 1363, Society for Economic Dynamics.
  6. Ariel Burstein & Gita Gopinath, 2013. "International Prices and Exchange Rates," NBER Working Papers 18829, National Bureau of Economic Research, Inc.
  7. Mario J. Crucini, 2011. "Comment on "Nontraded Goods Prices, Terms of Trade and International Risk-Sharing: An Empirical Investigation"," NBER Chapters, in: NBER International Seminar on Macroeconomics 2011, pages 470-476 National Bureau of Economic Research, Inc.

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