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

Author

Listed:
  • Ariel T. Burstein

    (Northwestern University)

  • Joao C. Neves

    (Portuguese Catholic university)

  • Sergio Rebelo

    (Northwestern University, NBER and CEPR)

Abstract

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.

Suggested Citation

  • 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).
    • Handle: RePEc:roc:rocher:473
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    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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