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Understanding Real Exchange Rate Movements with Trade in Intermediate Products

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  • Parsley, David
  • Popper, Helen

Abstract

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.

Suggested Citation

  • Parsley, David & Popper, Helen, 2009. "Understanding Real Exchange Rate Movements with Trade in Intermediate Products," MPRA Paper 21117, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:21117
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Anthony Landry & Mario Crucini, 2010. "Accounting for Real Exchange Rates using Micro-Data," 2010 Meeting Papers 1100, Society for Economic Dynamics.
    2. Nakamura, Emi & Zerom, Dawit, 2008. "Accounting for Incomplete Pass-Through," MPRA Paper 14389, University Library of Munich, Germany.
    3. Cheung, Yin-Wong & Chinn, Menzie D. & Qian, XingWang, 2012. "Are Chinese trade flows different?," Journal of International Money and Finance, Elsevier, vol. 31(8), pages 2127-2146.
    4. Bache, Ida Wolden & Sveen, Tommy & Torstensen, Kjersti Næss, 2013. "Revisiting the importance of non-tradable goods' prices in cyclical real exchange rate fluctuations," European Economic Review, Elsevier, vol. 57(C), pages 98-107.
    5. Joong Shik Kang & Wei Liao, 2016. "Chinese Imports; What’s Behind the Slowdown?," IMF Working Papers 16/106, International Monetary Fund.
    6. Waldyr Areosa & Marta Areosa, 2012. "The Signaling Effect of Exchange Rates: pass-through under dispersed information," Working Papers Series 282, Central Bank of Brazil, Research Department.
    7. Yin-Wong Cheung & Menzie D. Chinn & Eiji Fujii, 2010. "Measuring Renminbi Misalignment: Where Do We Stand?," Working Papers 242010, Hong Kong Institute for Monetary Research.

    More about this item

    Keywords

    Real Exchange Rates; PPP; MSE decomposition;

    JEL classification:

    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • F3 - International Economics - - International Finance

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