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Real Exchange Rate Variations, Nontraded Goods and Disaggregated CPI Data


  • Marco A. Hernandez Vega


The behavior of the real exchange rate, measuring movements in the relative consumer price indexes between countries, remains a prominent puzzle in international macroeconomics. Two key theories of the real exchange rate differ in the role played by goods not traded internationally. On one hand, the theory of Balassa-Samuelson, on the other hand, models with sticky prices. This study provides new empirical evidence on nontraded goods importance in real exchange volatility by using more highly disaggregated data than used in previous literature on prices and trade between the U.S. and Mexico for the period 2002-2009. The main results suggest that the nontraded component accounts for between 69 and up to 84 percent of the real exchange rate volatility. In addition, the results show that the nontraded component is negatively correlated with the traded component despite both countries being in a flexible exchange rate regime contradicting previous literature. These results generally support the Balassa-Samuelson theory.

Suggested Citation

  • Marco A. Hernandez Vega, 2012. "Real Exchange Rate Variations, Nontraded Goods and Disaggregated CPI Data," Working Papers 2012-05, Banco de México.
  • Handle: RePEc:bdm:wpaper:2012-05

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    References listed on IDEAS

    1. Charles Engel, 1999. "Accounting for U.S. Real Exchange Rate Changes," Journal of Political Economy, University of Chicago Press, vol. 107(3), pages 507-538, June.
    2. 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.
    3. Betts, Caroline M. & Kehoe, Timothy J., 2006. "U.S. real exchange rate fluctuations and relative price fluctuations," Journal of Monetary Economics, Elsevier, vol. 53(7), pages 1297-1326, October.
    4. Ariel Burstein & Martin Eichenbaum & Sergio Rebelo, 2005. "Large Devaluations and the Real Exchange Rate," Journal of Political Economy, University of Chicago Press, vol. 113(4), pages 742-784, August.
    5. Bela Balassa, 1964. "The Purchasing-Power Parity Doctrine: A Reappraisal," Journal of Political Economy, University of Chicago Press, vol. 72, pages 584-584.
    6. Mario J. Crucini & Chris I. Telmer & Marios Zachariadis, 2005. "Understanding European Real Exchange Rates," American Economic Review, American Economic Association, vol. 95(3), pages 724-738, June.
    7. Enrique G. Mendoza, 2000. "On the Instability of Variance Decompositions of the Real Exchange Rate across Exchange-Rate-Regimes: Evidence from Mexico and the United States," NBER Working Papers 7768, National Bureau of Economic Research, Inc.
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    More about this item


    Real exchange rates; Relative prices.;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange

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