This study measures the proportion of U.S. real exchange rate movements that can be accounted for by movements in the relative prices of non-traded goods. The decomposition is done at all possible horizons that the data allow -- from one month up to thirty years. The accounting is performed with five different measures of non-traded goods prices and real exchange rates, for exchange rates of the U.S. relative to a number of other high income countries in each case. The outcome is surprising -- relative prices of non-traded goods appear to account for essentially none of the movement of U.S. real exchange rates at any horizon. Only for one crude measure, which uses the aggregate producer price index as an index of traded goods prices, do non-traded goods prices seem to account for more than a tiny portion of real exchange rate changes. This pattern appears to be true even during fixed nominal exchange rate episodes. Special attention is paid to the U.S. real exchange rate with Japan. The possibility of mismeasurement of traded goods prices is explored.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
5394.
Length: Date of creation: Dec 1995 Date of revision: Handle: RePEc:nbr:nberwo:5394
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Find related papers by JEL classification: F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance F3 - International Economics - - International Finance
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References listed on IDEAS 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.:
Froot, Kenneth A. & Kim, Michael & Rogoff, Kenneth, 1995.
"The Law of One Price Over 700 Years,"
Working Papers
95-13, C.V. Starr Center for Applied Economics, New York University.
[Downloadable!]
Charles Engel & John H. Rogers, 1994.
"How Wide is the Border?,"
NBER Working Papers
4829, National Bureau of Economic Research, Inc.
[Downloadable!] (restricted)
Other versions:
Engel, Charles & Rogers, John H, 1996.
"How Wide Is the Border?,"
American Economic Review,
American Economic Association, vol. 86(5), pages 1112-25, December.
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