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Nontraded Goods, Market Segmentation, and Exchange Rates

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Author Info
Michael Dotsey
Margarida Duarte

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Abstract

Empirical evidence suggests that movements in international relative prices are large and persistent. Nontraded goods, both in the form of final consumption goods and as an input into the production of final tradable goods, are an important aspect driving international relative price movements. In this paper we show that nontraded goods play an important role in the context of an otherwise standard open-economy macromodel. Our quantitative study with nontraded goods generates implications along several dimensions that are more closely in line with the data relative to the model that abstracts from nontraded goods. In addition, contrary to a large literature, standard alternative assumptions about the currency in which firms price their goods are virtually inconsequential for the properties of aggregate variables in our model, other than the terms of trade.

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Paper provided by University of Toronto, Department of Economics in its series Working Papers with number tecipa-338.

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Length: 47 pages
Date of creation: 01 Oct 2008
Date of revision:
Handle: RePEc:tor:tecipa:tecipa-338

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Related research
Keywords: exchange rates; nontraded goods; distribution services; incomplete asset markets.;

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Find related papers by JEL classification:
F3 - International Economics - - International Finance
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Michael Dotsey & Margarida Duarte, 2008. "Nontraded Goods, Market Segmentation, and Exchange Rates," Working Papers tecipa-338, University of Toronto, Department of Economics. [Downloadable!]
    Other versions:
  2. Riccardo Cristadoro & Andrea Gerali & Stefano Neri & Massimiliano Pisani, 2008. "Real exchange rate volatility and disconnect: an empirical investigation," Temi di discussione (Economic working papers) 660, Bank of Italy, Economic Research Department. [Downloadable!]
  3. Christoph Thoenissen, 2006. " Real Exchange Rate Volatility and Asset Market Structure," CDMA Working Paper Series 0609, Centre for Dynamic Macroeconomic Analysis, revised Oct 2006. [Downloadable!]
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