Trade Costs and Real Exchange Rate Volatility
This paper examines the impact of trade costs on real exchange rate volatil- ity. We model two channels endogenously in a Ricardian framework: (i) non- tradability and (ii) heterogeneous suppliers of traded goods. The Â¯rst channel is examined by constructing a two-country Ricardian model of trade, based on the work of Dornbusch, Fischer and Samuelson (1977), which endogenizes the size of the nontradable sector. The model shows that higher trade costs result in a larger nontradable sector, which in turn leads to higher real ex- change rate volatility. The key mechanism underlying this result is that the price of nontraded goods will not adjust immediately across countries given a country-speciÂ¯c shock. We provide evidence using a cross-country panel data set that tests for the impact of our channel as well as supporting three central predictions of the model. The second channel is examined by constructing a multi-country Ricardian model of trade with technological shocks, based on the work of Eaton and Kortum (2002), where real exchange rate volatilities will vary across countries because each country has a diÂ®erent set suppliers of traded goods. This heterogeneity arises endogenously due to technological differences and trade costs. In this world, relative differences across countries is key. The model enables us to examine the impact of geopolitical forces (e.g., trade agreements) and trade costs on bilateral real exchange rate volatility, as well as exploring the impact of the variety of trade on exchange rate volatility empirically
To our knowledge, this item is not available for
download. To find whether it is available, there are three
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.
|Date of creation:||11 Aug 2004|
|Date of revision:|
|Contact details of provider:|| Phone: 1 212 998 3820|
Fax: 1 212 995 4487
Web page: http://www.econometricsociety.org/pastmeetings.asp
More information through EDIRC
When requesting a correction, please mention this item's handle: RePEc:ecm:latm04:227. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F. Baum)
If references are entirely missing, you can add them using this form.