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Accounting for Real Exchange Rates using Micro-Data

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  • Anthony Landry

    (Federal Reserve Bank of Dallas)

  • Mario Crucini

    (Vanderbilt University)

Abstract

There are two stark views of the forces driving aggregate real exchange rates in the short-run. One view is that all of the variance is accounted for by non-traded items in the CPI basket (the classical dichotomy view), the other, due to Engel (1999), claims the opposite, with all of the variance attributable to traded items. We formulate a novel variance decomposition technique to deal with the large covariance of LOP deviations across goods. We find that the facts lie almost exactly between these two views. While the contribution to real exchange rate variability differs across goods, the dichotomous classification into traded and non-traded categories is not a good way to characterize those difference. We argue that the view that all retail goods are composites of traded and non-traded inputs is preferrable as it `convexifies' the two polar views and brings the data much closer to recent theoretical approaches emphasizing a distribution margin or trade in intermediate inputs.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2010 Meeting Papers with number 1100.

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Date of creation: 2010
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Handle: RePEc:red:sed010:1100

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References

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  1. Mario Crucini & Chris Telmer & Marios Zachariadis, . "Understanding European Real Exchange Rates," GSIA Working Papers 227, Carnegie Mellon University, Tepper School of Business.
  2. 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).
  3. Charles Engel & John H. Rogers, 1995. "How wide is the border?," Research Working Paper 95-09, Federal Reserve Bank of Kansas City.
  4. Caroline M. Betts & Timothy J. Kehoe, 2004. "U.S. Real Exchange Rate Fluctuations and Relative Price Fluctuations," Levine's Bibliography 122247000000000587, UCLA Department of Economics.
  5. Ariel Burstein & Martin Eichenbaum & Sergio Rebelo, 2004. "Large Devaluations and the Real Exchange Rate," NBER Working Papers 10986, National Bureau of Economic Research, Inc.
  6. David Parsley & Helen Popper, 2010. "Understanding Real Exchange Rate Movements With Trade In Intermediate Products," Pacific Economic Review, Wiley Blackwell, vol. 15(2), pages 171-188, 05.
  7. T. W.Swan, 1960. "Economic Control In A Dependent Economy," The Economic Record, The Economic Society of Australia, vol. 36(73), pages 51-66, 03.
  8. W. E. G. Salter, 1959. "Internal And External Balance: The Role Op Price And Expenditure Effects," The Economic Record, The Economic Society of Australia, vol. 35(71), pages 226-238, 08.
  9. 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.
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Cited by:
  1. Anthony Landry & Marianne Baxter, 2013. "IKEA: Product, Pricing, and Pass-Through," 2013 Meeting Papers 1363, Society for Economic Dynamics.
  2. Giancarlo Corsetti & Luca Dedola & Francesca Viani, 2012. "Traded and nontraded goods prices, and international risk sharing: an empirical investigation," Banco de Espa�a Working Papers 1242, Banco de Espa�a.
  3. Hakan Yilmazkuday & Mario J. Crucini, 2014. "Understanding Long-run Price Dispersion," Working Papers 1407, Florida International University, Department of Economics.
  4. Ariel Burstein & Gita Gopinath, 2013. "International Prices and Exchange Rates," NBER Working Papers 18829, National Bureau of Economic Research, Inc.
  5. 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.
  6. Ikeno, Hidehiro, 2014. "Pairwise tests of convergence of Japanese local price levels," International Review of Economics & Finance, Elsevier, vol. 31(C), pages 232-248.
  7. Mario J. Crucini & J. Scott Davis, 2013. "Distribution Capital and the Short- and Long-run Import Demand Elasticity," CAMA Working Papers 2013-56, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.

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