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Dispersion in Real Exchange Rates

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Author Info
Mario J. Crucini () (Department of Economics, Vanderbilt University)
Chris I. Telmer () (Graduate School of Industrial Administration, Carnegie Mellon University)
Marios Zachariadis () (Department of Economics, Ohio State University)

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Abstract

Using cross-sectional data on local currency prices of over 1,800 retail goods and services across 13 European countries in the mid 1980's, we characterize the behavior of average relative prices -- `real exchange rates' -- as well as dispersion around these averages. We find that the averages are surprisingly close to what purchasing power parity would suggest. In other words, in the mid 1980's, averages of ratios of foreign to domestic prices (across goods for a particular pair of countries) provide surprisingly accurate predictions of most nominal cross-rates. Variation around the averages, however, is large but is found to be related to economically meaningful characteristics of goods such as measures of international tradeability, the importance of non-traded inputs into production and the geographical distance between product markets. Using data on product brands, we find that product heterogeneity is at least as important as geography in explaining relative price dispersion.

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File URL: http://www.vanderbilt.edu/econ/wparchive/workpaper/vu00-w13.pdf
File Format: application/pdf
File Function: Revised version, 2000
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Publisher Info
Paper provided by Department of Economics, Vanderbilt University in its series Working Papers with number 0013.

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Date of creation: Jun 1998
Date of revision: May 2000
Handle: RePEc:van:wpaper:0013

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Find related papers by JEL classification:
F00 - International Economics - - General - - - General
F31 - International Economics - - International Finance - - - Foreign Exchange

Cited by:
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  1. Yuriy Gorodnichenko & Linda Tesar, 2005. "A Re-Examination of the Border Effect," NBER Working Papers 11706, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  2. David C. Parsley & Shang-Jin Wei, 2001. "Limiting Currency Volatility to Stimulate Goods Market Integration: A Price-Based Approach," IMF Working Papers 01/197, International Monetary Fund. [Downloadable!]
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  3. Salvador Gil-Pareja & Simón Sosvilla-Rivero, 2004. "Export market integration in the European Union," Journal of Applied Economics, Universidad del CEMA, vol. 0, pages 271-301, November. [Downloadable!]
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  4. James E. Anderson & Eric van Wincoop, 2004. "Trade Costs," NBER Working Papers 10480, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. Marios Zachariadis, . "Productivity and Prices in Europe: Micro-Evidence for the Period 1975 to 1990," Departmental Working Papers 2004-06, Department of Economics, Louisiana State University. [Downloadable!]
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  6. Berka, Martin, 2006. "Non-linear adjustment in law of one price deviations and physical characteristics of goods," MPRA Paper 8606, University Library of Munich, Germany, revised Dec 2007. [Downloadable!]
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  7. David C. Parsley & Shang-Jin Wei, 2000. "Explaining the Border Effect: The Role of Exchange Rate Variability, Shipping Costs, and Geography," NBER Working Papers 7836, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  8. John H. Rogers, 2001. "Price level convergence, relative prices, and inflation in Europe," International Finance Discussion Papers 699, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  9. David Parsley Shang-Jin Wei, 2002. "Currency Arrangements And Goods Market Integration: A Price Based Approach," International Finance 0211004, EconWPA. [Downloadable!]
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