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Distribution Costs and Real Exchange Rate Dynamics During Exchange-Rate-Based Stabilization

  • Burstein, Ariel Tomas
  • Neves, Joao C
  • Rebelo, Sérgio

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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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2944.

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Date of creation: Sep 2001
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Handle: RePEc:cpr:ceprdp:2944
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  1. Hummels, David, 1999. "Toward a Geography of Trade Costs," GTAP Working Papers 1162, Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University.
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