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Understanding Real Exchange Rate Movements with Trade in Intermediate Products

  • Parsley, David
  • Popper, Helen

We suggest it may be "too easy" to attribute real exchange rate movements to law of one price deviations. We show that it is immaterial whether one uses seemingly traded goods, nontraded goods, or even just a single, unimportant consumer good, say beer. The ease of attributing the variation to any such deviations is explained using a model with intermediate goods trade. In the model, the stage of production determines the traded/nontraded distinction. We find empirical substantiation for the model: law of one price deviations lose explanatory power; and - defined appropriately in terms of intermediate goods - relative prices matter.

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File URL: https://mpra.ub.uni-muenchen.de/21117/1/MPRA_paper_21117.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 21117.

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Date of creation: Feb 2009
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Handle: RePEc:pra:mprapa:21117
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