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Product Introductions, Currency Unions, and the Real Exchange Rate

Listed author(s):
  • Roberto Rigobon

    (Massachusetts Institute of Technology)

  • Brent Neiman

    (University of Chicago)

  • Alberto Cavallo

    (MIT)

We use a novel dataset of online prices of identical goods sold by four large global retailers in dozens of countries to study good-level real exchange rates and their aggregated behavior. First, in contrast to the prior literature, we demonstrate that the law of one price holds perfectly within currency unions for thousands of goods sold by each of the retailers, implying good-level real exchange rates equal to one. Prices of these same goods exhibit large deviations from the law of one price outside of currency unions, even when the nominal exchange rate is pegged. This clarifies that it is the common currency per se, rather than the lack of nominal volatility, that results in the lack of cross-country differences in the prices of these goods. Second, we use a novel decomposition to show that most of the cross-sectional variation in good-level real exchange rates reflects differences in prices at the time products are first introduced, as opposed to the component emerging from heterogeneous passthrough or from nominal rigidities during the life of the good. In fact, international relative prices measured at the time of introduction move together with the nominal exchange rate. This stands in sharp contrast to pricing behavior in models where all price rigidity for any given good is due simply to costly price adjustment for that good.

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File URL: https://economicdynamics.org/meetpapers/2013/paper_1357.pdf
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Paper provided by Society for Economic Dynamics in its series 2013 Meeting Papers with number 1357.

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Date of creation: 2013
Handle: RePEc:red:sed013:1357
Contact details of provider: Postal:
Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

Web page: http://www.EconomicDynamics.org/
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  1. Christian Broda & David E. Weinstein, 2008. "Understanding International Price Differences Using Barcode Data," NBER Working Papers 14017, National Bureau of Economic Research, Inc.
  2. Baxter, Marianne & Landry, Anthony E., 2012. "IKEA: product, pricing, and pass-through," Proceedings, Federal Reserve Bank of San Francisco, issue Nov, pages 1-32.
  3. Jean Imbs & Haroon Mumtaz & Morten O. Ravn & Hélène Rey, 2005. "PPP Strikes Back: Aggregation And the Real Exchange Rate," The Quarterly Journal of Economics, Oxford University Press, vol. 120(1), pages 1-43.
  4. Fernando Borraz & Alberto Cavallo & Roberto Rigobon & Leandro Zipitria, 2016. "Distance and Political Boundaries: Estimating Border Effects under Inequality Constraints," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 21(1), pages 3-35, 01.
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  7. Emi Nakamura & Jón Steinsson, 2012. "Lost in Transit: Product Replacement Bias and Pricing to Market," American Economic Review, American Economic Association, vol. 102(7), pages 3277-3316, December.
  8. Crucini, Mario J. & Shintani, Mototsugu & Tsuruga, Takayuki, 2010. "Accounting for persistence and volatility of good-level real exchange rates: The role of sticky information," Journal of International Economics, Elsevier, vol. 81(1), pages 48-60, May.
  9. A. Kerem Cosar & Paul L. E. Grieco & Felix Tintelnot, 2012. "Borders, Geography, and Oligopoly: Evidence from the Wind Turbine Industry," Koç University-TUSIAD Economic Research Forum Working Papers 1228, Koc University-TUSIAD Economic Research Forum.
  10. Doireann Fitzgerald & Stefanie Haller, 2014. "Pricing-to-Market: Evidence From Plant-Level Prices," Review of Economic Studies, Oxford University Press, vol. 81(2), pages 761-786.
  11. Crucini, Mario J. & Shintani, Mototsugu, 2008. "Persistence in law of one price deviations: Evidence from micro-data," Journal of Monetary Economics, Elsevier, vol. 55(3), pages 629-644, April.
  12. Martin Berka & Michael B. Devereux & Charles Engel, 2012. "Real Exchange Rate Adjustment in and out of the Eurozone," American Economic Review, American Economic Association, vol. 102(3), pages 179-185, May.
  13. Yuriy Gorodnichenko & Linda L. Tesar, 2009. "Border Effect or Country Effect? Seattle May Not Be So Far from Vancouver After All," American Economic Journal: Macroeconomics, American Economic Association, vol. 1(1), pages 219-241, January.
  14. Etienne Gagnon & Benjamin R. Mandel & Robert J. Vigfusson, 2014. "Missing Import Price Changes and Low Exchange Rate Pass-Through," American Economic Journal: Macroeconomics, American Economic Association, vol. 6(2), pages 156-206, April.
  15. repec:hrv:faseco:32116841 is not listed on IDEAS
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