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Real exchange rate dynamics in the presence of non-traded goods and transaction costs

  • Lee, Inkoo
  • Shin, Jonghyup

This paper studies the role of non-traded goods and transaction costs in accounting for the puzzling behavior of real exchange rates. We show that introducing the transaction costs and non-traded goods in an otherwise standard competitive model dramatically improves its ability to rationalize observed real exchange rate dynamics.

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File URL: http://www.sciencedirect.com/science/article/B6V84-4XW0089-1/2/f3cf81d2d991f8a194675cc9b591895b
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Article provided by Elsevier in its journal Economics Letters.

Volume (Year): 106 (2010)
Issue (Month): 3 (March)
Pages: 216-218

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Handle: RePEc:eee:ecolet:v:106:y:2010:i:3:p:216-218
Contact details of provider: Web page: http://www.elsevier.com/locate/ecolet

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  1. Maurice Obstfeld & Kenneth Rogoff, 2001. "The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?," NBER Chapters, in: NBER Macroeconomics Annual 2000, Volume 15, pages 339-412 National Bureau of Economic Research, Inc.
  2. Mario Crucini & Chris Telmer & Marios Zachariadis, . "Understanding European Real Exchange Rates," GSIA Working Papers 227, Carnegie Mellon University, Tepper School of Business.
  3. James E. Anderson & Eric van Wincoop, 2004. "Trade Costs," NBER Working Papers 10480, National Bureau of Economic Research, Inc.
  4. Crucini, Mario J. & Shintani, Mototsugu, 2008. "Persistence in law of one price deviations: Evidence from micro-data," Journal of Monetary Economics, Elsevier, vol. 55(3), pages 629-644, April.
  5. V.V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2002. "Can sticky price models generate volatile and persistent real exchange rates?," Staff Report 277, Federal Reserve Bank of Minneapolis.
  6. Burstein, Ariel T. & Neves, Joao C. & Rebelo, Sergio, 2003. "Distribution costs and real exchange rate dynamics during exchange-rate-based stabilizations," Journal of Monetary Economics, Elsevier, vol. 50(6), pages 1189-1214, September.
  7. Betts, Caroline & Devereux, Michael B., 2000. "Exchange rate dynamics in a model of pricing-to-market," Journal of International Economics, Elsevier, vol. 50(1), pages 215-244, February.
  8. Hummels, David, 1999. "Toward a Geography of Trade Costs," GTAP Working Papers 1162, Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University.
  9. Sercu, Piet & Uppal, Raman & Van Hulle, Cynthia, 1995. " The Exchange Rate in the Presence of Transaction Costs: Implications for Tests of Purchasing Power Parity," Journal of Finance, American Finance Association, vol. 50(4), pages 1309-19, September.
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