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Distribution costs and real exchange rate dynamics during exchange-rate-based stabilizations

  • Burstein, Ariel T.
  • Neves, Joao C.
  • Rebelo, Sergio

This Paper studies the role played by distribution costs in shaping the behaviour of the real exchange rate during exchange-rate-based stabilizations. We document that distribution costs are very large for the average consumer good: the represent more than 40% of the retail price in the US and 60% of the retail price in Argentina. Distribution services require local labour and so so they drive a natural wedge between retail prices in different countries. We show that introducing a distribution sector in an otherwise standard model of exchange-rate-based stabilizations dramatically improves its ability to rationalise observed real exchange rate dynamics.

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Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 50 (2003)
Issue (Month): 6 (September)
Pages: 1189-1214

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Handle: RePEc:eee:moneco:v:50:y:2003:i:6:p:1189-1214
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