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External rebalancing is not just an exporters' story: real exchange rates, the non-tradable sector and the euro

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  • Ruscher, Eric
  • Wolff, Guntram B.

Abstract

Global and European trade balances have seen strong divergences combined with strong movements in the exchange rate. Trade balances and real effective exchange rates are related. Using different measures of the real effective exchange rate, we show that this long-run link hinges on the relative price of non-tradable to tradable goods and services in relation to their trading partners. An improvement in the trade balance is associated with a fall in the relative price of non-tradable goods and services. The elimination of nominal exchange rates with the euro does not change these relationships. Government consumption increases the relative price of nontradable goods. The results highlight the importance of internal price adjustments for external balances, a point frequently overlooked in policy debates.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 19151.

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Date of creation: Apr 2009
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Handle: RePEc:pra:mprapa:19151

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Keywords: real exchange rate; non-tradable sector; euro;

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Cited by:
  1. Regling, Klaus & Deroose, Servaas & Felke, Reinhard & Kutos, Paul, 2010. "The Euro After Its First Decade: Weathering the Financial Storm and Enlarging the Euro Area," ADBI Working Papers 205, Asian Development Bank Institute.
  2. Klaus Regling & Servaas Deroose & Reinhard Felke & Paul Kutos, 2010. "The Euro After Its First Decade : Weathering the Financial Storm and Enlarging the Euro Area," Governance Working Papers 22817, East Asian Bureau of Economic Research.

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