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Real Exchange Rate Fluctuations, Wage Stickiness and Tradability

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  • Yothin Jinjarak

    (University of London)

  • Kanda Naknoi

    (University of Connecticut)

Abstract

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.

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Bibliographic Info

Paper provided by University of Connecticut, Department of Economics in its series Working papers with number 2013-01.

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Length: 37 pages
Date of creation: Feb 2013
Date of revision:
Handle: RePEc:uct:uconnp:2013-01

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Web page: http://www.econ.uconn.edu/
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Keywords: real exchange rate; wage stickiness; tradability;

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  1. Yuriy Gorodnichenko & Enrique G. Mendoza & Linda L. Tesar, 2009. "The Finnish Great Depression: From Russia with Love," NBER Working Papers 14874, National Bureau of Economic Research, Inc.
  2. Engel, C., 1996. "Accounting for U.S. Real Exchange Rate Changes," Discussion Papers in Economics at the University of Washington 96-02, Department of Economics at the University of Washington.
  3. Burstein, Ariel Tomas & Eichenbaum, Martin & Rebelo, Sérgio, 2004. "Large Devaluations and the Real Exchange Rate," CEPR Discussion Papers 4810, C.E.P.R. Discussion Papers.
  4. Mario J. Crucini & Mototsugu Shintani, 2002. "Persistence in Law-Of-One-Price Deviations: Evidence from Micro-Data," Vanderbilt University Department of Economics Working Papers 0222, Vanderbilt University Department of Economics, revised Jul 2004.
  5. 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.
  6. Kehoe, Timothy J. & Ruhl, Kim J., 2009. "Sudden stops, sectoral reallocations, and the real exchange rate," Journal of Development Economics, Elsevier, vol. 89(2), pages 235-249, July.
  7. Castellanos, Sara G. & Garcia-Verdu, Rodrigo & Kaplan, David S., 2004. "Nominal wage rigidities in Mexico: evidence from social security records," Journal of Development Economics, Elsevier, vol. 75(2), pages 507-533, December.
  8. 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.
  9. Liu, Zheng & Phaneuf, Louis, 2007. "Technology shocks and labor market dynamics: Some evidence and theory," Journal of Monetary Economics, Elsevier, vol. 54(8), pages 2534-2553, November.
  10. Yin-Wong Cheung & Eiji Fujii, 2008. "Deviations from the Law of One Price in Japan," CESifo Working Paper Series 2275, CESifo Group Munich.
  11. Naknoi, Kanda, 2008. "Real exchange rate fluctuations, endogenous tradability and exchange rate regimes," Journal of Monetary Economics, Elsevier, vol. 55(3), pages 645-663, April.
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