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Real Exchange Rate Fluctuations, Wage Stickiness and Tradability

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  • Yothin Jinjarak
  • Kanda Naknoi

Abstract

This study proposes a new measure of tradability and examines its relationship with volatility of the sector-speci c real exchange rate (RER). We derive degree of tradability from a model in which nal goods are produced from labor, capital and intermediate inputs. With free capital mobility, the share of labor in value added measures degree of nontradability. Then the RER is driven by changes in relative wage and those in seller's markup. The contribution of relative wage into RER variance is predicted to be increasing in nontradability. We provide evidence for our theory using U.S.-Canada monthly RERs and U.S.-Germany quarterly RERs.

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Bibliographic Info

Paper provided by Purdue University, Department of Economics in its series Purdue University Economics Working Papers with number 1255.

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Length: 36 pages
Date of creation: Sep 2010
Date of revision:
Handle: RePEc:pur:prukra:1255

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Keywords: real exchange rate; wage stickiness; tradability;

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  1. Ariel Burstein & Martin Eichenbaum & Sergio Rebelo, 2005. "Large Devaluations and the Real Exchange Rate," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 113(4), pages 742-784, August.
  2. 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.
  3. Naknoi, Kanda, 2008. "Real exchange rate fluctuations, endogenous tradability and exchange rate regimes," Journal of Monetary Economics, Elsevier, Elsevier, vol. 55(3), pages 645-663, April.
  4. Yuriy Gorodnichenko & Enrique G. Mendoza & Linda L. Tesar, 2012. "The Finnish Great Depression: From Russia with Love," American Economic Review, American Economic Association, American Economic Association, vol. 102(4), pages 1619-44, June.
  5. Yin-Wong Cheung & Eiji Fujii, 2008. "Deviations from the Law of One Price in Japan," CESifo Working Paper Series, CESifo Group Munich 2275, CESifo Group Munich.
  6. Betts, Caroline M. & Kehoe, Timothy J., 2006. "U.S. real exchange rate fluctuations and relative price fluctuations," Journal of Monetary Economics, Elsevier, Elsevier, vol. 53(7), pages 1297-1326, October.
  7. Kehoe, Timothy J. & Ruhl, Kim J., 2009. "Sudden stops, sectoral reallocations, and the real exchange rate," Journal of Development Economics, Elsevier, Elsevier, vol. 89(2), pages 235-249, July.
  8. Charles Engel, 1995. "Accounting for U.S. Real Exchange Rate Changes," NBER Working Papers 5394, National Bureau of Economic Research, Inc.
  9. Crucini, Mario J. & Shintani, Mototsugu, 2008. "Persistence in law of one price deviations: Evidence from micro-data," Journal of Monetary Economics, Elsevier, Elsevier, vol. 55(3), pages 629-644, April.
  10. Castellanos, Sara G. & Garcia-Verdu, Rodrigo & Kaplan, David S., 2004. "Nominal wage rigidities in Mexico: evidence from social security records," Journal of Development Economics, Elsevier, Elsevier, vol. 75(2), pages 507-533, December.
  11. Liu, Zheng & Phaneuf, Louis, 2007. "Technology shocks and labor market dynamics: Some evidence and theory," Journal of Monetary Economics, Elsevier, Elsevier, vol. 54(8), pages 2534-2553, November.
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