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Real Exchange Rate Dynamics With Endogenous Distribution Costs

Listed author(s):
  • Mulraine, Millan L. B.

The importance of distribution costs in generating the deviations from the law of one price has been well documented. In this paper we show that a two-country flexible price dynamic general equilibrium model driven by exogenous innovations to technology, and with a localized distribution services sector can replicate the key dynamic features of the real exchange rate. In doing so, the paper identifies the importance of two key channels for real exchange rate dynamics. That is, we show: (i) that shocks in the real sector are important contributors to movements in the real exchange rate, and (ii) that the endogenous wedge created by distribution costs of traded goods is a significant source of fluctuation for the real exchange rate, and the overall macro-economy as a whole. The evidence presented here demonstrates that this model - without any nominal rigidities, can account for up to 89% of the relative volatility in the real exchange rate.

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File URL: https://mpra.ub.uni-muenchen.de/9/1/MPRA_paper_9.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 9.

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Date of creation: Sep 2006
Handle: RePEc:pra:mprapa:9
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  12. Burstein, Ariel Tomas & Neves, Joao C & Rebelo, Sérgio, 2001. "Distribution Costs and Real Exchange Rate Dynamics During Exchange-Rate-Based Stabilization," CEPR Discussion Papers 2944, C.E.P.R. Discussion Papers.
  13. Maurice Obstfeld & Kenneth Rogoff, 2001. "The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?," International Trade 0012003, EconWPA.
  14. Millan L. B. Mulraine, 2005. "Investment-Specific Technology Shocks in a Small Open Economy," Macroeconomics 0506009, EconWPA.
  15. Ariel T. Burstein & João C. Neves & Sergio Rebelo, 2004. "Investment Prices and Exchange Rates: Some Basic Facts," Journal of the European Economic Association, MIT Press, vol. 2(2-3), pages 302-309, 04/05.
  16. David K. Backus & Patrick J. Kehoe & Finn E. Kydland, 1987. "International real business cycles," Working Papers 426, Federal Reserve Bank of Minneapolis.
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  18. Boileau, Martin, 2002. "Trade in capital goods and investment-specific technical change," Journal of Economic Dynamics and Control, Elsevier, vol. 26(6), pages 963-984, June.
  19. Jonas D. M. Fisher, 1999. "The new view of growth and business cycles," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q I, pages 35-56.
  20. Jonas D. M. Fisher, 2002. "Technology shocks matter," Working Paper Series WP-02-14, Federal Reserve Bank of Chicago.
  21. Carr, Jack L. & Floyd, John E., 2002. "Real and monetary shocks to the Canadian dollar: Do Canada and the United States form an optimal currency area?," The North American Journal of Economics and Finance, Elsevier, vol. 13(1), pages 21-39, May.
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  24. Betts, Caroline & Devereux, Michael B., 1996. "The exchange rate in a model of pricing-to-market," European Economic Review, Elsevier, vol. 40(3-5), pages 1007-1021, April.
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