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Expanding Varieties in the Nontraded Goods Sector and the Real Exchange Rate Depreciation

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  • He, Qichun

Abstract

This paper studies how the real exchange rate changes with economic growth. Although Devereux (1999) proves that endogenous growth in the distribution sector can cause exchange rate depreciation, MacDonald and Rucci (2005) empirically find that growth in the distribution sector significantly causes the exchange rate to appreciate. To resolve the discrepancy, we replace perfect competition with monopolistic competition in the nontraded goods sector. Although growth of the distribution sector may cause the currency to appreciate, the endogenous growth in the nontraded goods sector tends to cause the currency to depreciate, because the expanding varieties from monopolistic competition drive down the price index of nontraded goods. With reasonable structural parameters, the latter effect dominates, and the real exchange rate depreciates. An economy with a smaller elasticity of substitution between demand for different varieties of the nontraded goods or higher TFP growth in the nontraded goods sector is more likely to have real exchange rate depreciation.

Suggested Citation

  • He, Qichun, 2010. "Expanding Varieties in the Nontraded Goods Sector and the Real Exchange Rate Depreciation," MPRA Paper 31309, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:31309
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    File URL: https://mpra.ub.uni-muenchen.de/31309/1/MPRA_paper_31309.pdf
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    References listed on IDEAS

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    Cited by:

    1. Hernán Herrera-Echeverri & Jerry Haar & Alexander Arrieta Jiménez & Manuel Araújo Zapata, 2015. "Devaluation, Competitiveness And New Business Formation In Emerging Countries," Journal of Developmental Entrepreneurship (JDE), World Scientific Publishing Co. Pte. Ltd., vol. 20(03), pages 1-22, September.

    More about this item

    Keywords

    Nontraded goods sector; expanding varieties; real exchange rate;

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies

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