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Large Devaluations and the Real Exchange Rate

  • Sergio Rebelo
  • Ariel Burstein
  • Martin Eichenbaum

This paper argues that the primary force behind the large fall in real exchange rates that occurs after large devaluations is the slow adjustment in the price of nontradable goods and services. Our empirical analysis is based on data from four large devaluation episodes: Mexico (1994), Korea (1997), Brazil (1999), and Argentina (2001). We conduct a more detailed analysis of the Argentina case using disaggregated CPI data, data from our own survey of prices in Buenos Aires, and scanner data from supermarkets. We then construct an open economy general equilibrium model that can account for the slow adjustment in nontradable good prices after a large devaluation

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Paper provided by Society for Economic Dynamics in its series 2004 Meeting Papers with number 137.

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Date of creation: 2004
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Handle: RePEc:red:sed004:137
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Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

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  1. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 1998. "Can sticky price models generate volatile and persistent real exchange rates?," Staff Report 223, Federal Reserve Bank of Minneapolis.
  2. Ariel Burstein & Joao C. Neves & Sergio Rebelo, 2004. "Investment Prices and Exchange Rates: Some Basic Facts," NBER Working Papers 10238, National Bureau of Economic Research, Inc.
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  7. Ariel T. Burstein & Joao C. Neves & Sergio Rebelo, 2000. "Distribution Costs and Real Exchange Rate Dynamics During Exchange-Rate-Based Stabilizations," RCER Working Papers 473, University of Rochester - Center for Economic Research (RCER).
  8. Mark Bils, 2004. "Measuring the Growth from Better and Better Goods," NBER Working Papers 10606, National Bureau of Economic Research, Inc.
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  16. Mario J. Crucini & Chris I. Telmer & Marios Zachariadis, 2005. "Understanding European Real Exchange Rates," American Economic Review, American Economic Association, vol. 95(3), pages 724-738, June.
  17. Lach, Saul & Tsiddon, Daniel, 1992. "The Behavior of Prices and Inflation: An Empirical Analysis of Disaggregated Price Data," Journal of Political Economy, University of Chicago Press, vol. 100(2), pages 349-89, April.
  18. Peter J. Klenow, 2003. "Measuring consumption growth: the impact of new and better products," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 10-23.
  19. Brent R. Moulton & Karin E. Moses, 1997. "Addressing the Quality Change Issue in the Consumer Price Index," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 28(1), pages 305-366.
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