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Nontradable Goods and the Real Exchange Rate

  • Pau Rabanal

    ()

  • Vicente Tuesta

    ()

How important are nontradable goods and distribution costs to explain real exchange rate dynamics? We answer this question by estimating a general equilibrium model with intermediate and final tradable and nontradable goods. We find that the estimated model can match characteristics of the data that are relevant in international macroeconomics, such as real exchange rate persistence and volatility, and the correlation between the real exchange rate and other variables. The distinction between tradable and nontradable goods is key to understand real exchange rate fluctuations, but the introduction of distribution costs is not. Nontradable sector technology shocks explain about one third of real exchange rate volatility. We also show that, in order to explain the low correlation between the ratio of relative consumption and the real exchange rates across countries, demand shocks are necessary. Copyright Springer Science+Business Media New York 2013

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File URL: http://hdl.handle.net/10.1007/s11079-012-9250-8
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Article provided by Springer in its journal Open Economies Review.

Volume (Year): 24 (2013)
Issue (Month): 3 (July)
Pages: 495-535

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Handle: RePEc:kap:openec:v:24:y:2013:i:3:p:495-535
Contact details of provider: Web page: http://www.springerlink.com/link.asp?id=100323

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  17. Rabanal, Pau & Tuesta, Vicente, 2010. "Euro-dollar real exchange rate dynamics in an estimated two-country model: An assessment," Journal of Economic Dynamics and Control, Elsevier, vol. 34(4), pages 780-797, April.
  18. Adolfson, Malin & Laséen, Stefan & Lindé, Jesper & Villani, Mattias, 2005. "Bayesian Estimation of an Open Economy DSGE Model with Incomplete Pass-Through," Working Paper Series 179, Sveriges Riksbank (Central Bank of Sweden).
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