Real Exchange Rate Fluctuations, Wage Stickiness and Tradability

This study constructs a new measure of nontradability of goods and demonstrates that it can explain the sectoral heterogeneity of the variance of sector-specific real exchange rate depreciation. Our measure of nontradability is the share of labor costs, including those incurred in the production of intermediate inputs. In the empirical analysis, we employ monthly data of US-Canada sector pairs and quarterly data of US-Germany sector pairs. We found that, for a certain range of nontradability, an increase in the degree of nontradability raises the variance of sector-specific real exchange rate depreciation. In addition, an increase in the degree of nontradability raises the fraction of variance of sector-specific real exchange rate depreciation accounted for by wage inflation differentials.