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Dispersion in Real Exchange Rates

Listed author(s):
  • Mario J. Crucini


    (Department of Economics, Vanderbilt University)

  • Chris I. Telmer


    (Graduate School of Industrial Administration, Carnegie Mellon University)

  • Marios Zachariadis


    (Department of Economics, Ohio State University)

Using cross-sectional data on local currency prices of over 1,800 retail goods and services across 13 European countries in the mid 1980's, we characterize the behavior of average relative prices -- `real exchange rates' -- as well as dispersion around these averages. We find that the averages are surprisingly close to what purchasing power parity would suggest. In other words, in the mid 1980's, averages of ratios of foreign to domestic prices (across goods for a particular pair of countries) provide surprisingly accurate predictions of most nominal cross-rates. Variation around the averages, however, is large but is found to be related to economically meaningful characteristics of goods such as measures of international tradeability, the importance of non-traded inputs into production and the geographical distance between product markets. Using data on product brands, we find that product heterogeneity is at least as important as geography in explaining relative price dispersion.

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File Function: Revised version, 2000
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Paper provided by Vanderbilt University Department of Economics in its series Vanderbilt University Department of Economics Working Papers with number 0013.

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Date of creation: May 2000
Handle: RePEc:van:wpaper:0013
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