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Accounting for Real Exchange Rates using Micro-Data

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Author Info

  • 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
Date of revision:
Handle: RePEc:red:sed010:1100

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References

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  1. Betts, Caroline M. & Kehoe, Timothy J., 2006. "U.S. real exchange rate fluctuations and relative price fluctuations," Journal of Monetary Economics, Elsevier, vol. 53(7), pages 1297-1326, October.
  2. Ariel T. Burstein & Joao C. Neves & Sergio Rebelo, 2000. "Distribution Costs and Real Exchange Rate Dynamics During Exchange-Rate-Based-Stabilizations," NBER Working Papers 7862, National Bureau of Economic Research, Inc.
  3. Mario J. Crucini & Chris I. Telmer & Marios Zachariadis, 2005. "Understanding European Real Exchange Rates," American Economic Review, American Economic Association, vol. 95(3), pages 724-738, June.
  4. Engel, Charles & Rogers, John H, 1996. "How Wide Is the Border?," American Economic Review, American Economic Association, vol. 86(5), pages 1112-25, December.
  5. Ariel Burstein & Martin Eichenbaum & Sergio Rebelo, 2005. "Large Devaluations and the Real Exchange Rate," Journal of Political Economy, University of Chicago Press, vol. 113(4), pages 742-784, August.
  6. 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.
  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. Parsley, David & Popper, Helen, 2009. "Understanding Real Exchange Rate Movements with Trade in Intermediate Products," MPRA Paper 21117, University Library of Munich, Germany.
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Cited by:
  1. Corsetti, Giancarlo & Dedola, Luca & Viani, Francesca, 2011. "Traded and nontraded goods prices, and international risk sharing: an empirical investigation," CEPR Discussion Papers 8613, C.E.P.R. Discussion Papers.
  2. 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.
  3. Marianne Baxter & Anthony Landry, 2012. "IKEA: product, pricing, and pass-through," Globalization and Monetary Policy Institute Working Paper 132, Federal Reserve Bank of Dallas.
  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 & Hakan Yilmazkuday, 2013. "Understanding Long-run Price Dispersion," NBER Working Papers 18811, National Bureau of Economic Research, Inc.
  6. 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.
  7. Ikeno, Hidehiro, 2014. "Pairwise tests of convergence of Japanese local price levels," International Review of Economics & Finance, Elsevier, vol. 31(C), pages 232-248.

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