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Price Rigidities and the Relative PPP

Author

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  • Julio Blanco

    (University of Michigan)

  • Javier Cravino

    (University of Michigan)

Abstract

We measure the proportion of real exchange rate movements accounted for by cross-country movements in relative reset prices (prices that changed since the previous period) using CPI microdata for the UK, Austria and Mexico. Relative reset prices account for almost all of the real exchange rate movements in the data. This is at odds with the predictions of Sticky Price Open Economy models with complete markets, which generate volatile and persistent real exchange rates but not through movements in relative reset prices. We show that incomplete markets models featuring UIP deviations are much closer to replicating the empirical decomposition at low frequencies.

Suggested Citation

  • Julio Blanco & Javier Cravino, 2018. "Price Rigidities and the Relative PPP," 2018 Meeting Papers 346, Society for Economic Dynamics.
    • Handle: RePEc:red:sed018:346
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    Cited by:

    1. Isaac Baley & Andrés Blanco, 2021. "Aggregate Dynamics in Lumpy Economies," Econometrica, Econometric Society, vol. 89(3), pages 1235-1264, May.

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    More about this item

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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