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Distribution Costs and Real Exchange Rate Dynamics During Exchange-Rate-Based Stabilizations

  • Ariel T. Burstein

    (Northwestern University)

  • Joao C. Neves

    (Portuguese Catholic university)

  • Sergio Rebelo

    (Northwestern University, NBER and CEPR)

This paper studies the role played by the distribution sector in shaping the behavior of the real exchange rate during exchange-rate-based stabilizations. We use data for the U.S. and Argentina to document the importance of distribution margins in retail prices and disaggregated price data to study price dynamics in the aftermath of Argentina's 1991 Convertibility plan. Distribution services require local labor and land so they drive a natural wedge between retail prices in different countries. We study in detail the impact of introducing a distribution sector in an otherwise standard model of exchange-rate-based stabilizations. We show that this simple extension improves dramatically the ability of the model to rationalize observed real exchange rate dynamics.

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File URL: http://rcer.econ.rochester.edu/RCERPAPERS/rcer_473.pdf
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Paper provided by University of Rochester - Center for Economic Research (RCER) in its series RCER Working Papers with number 473.

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Length: 51 pages
Date of creation: May 2000
Date of revision:
Handle: RePEc:roc:rocher:473
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University of Rochester, Center for Economic Research, Department of Economics, Harkness 231 Rochester, New York 14627 U.S.A.

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