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Dispersion in Real Exchange Rates

Author

Listed:
  • 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)

Abstract

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.

Suggested Citation

  • Mario J. Crucini & Chris I. Telmer & Marios Zachariadis, 2000. "Dispersion in Real Exchange Rates," Vanderbilt University Department of Economics Working Papers 0013, Vanderbilt University Department of Economics.
  • Handle: RePEc:van:wpaper:0013
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    File URL: http://www.accessecon.com/pubs/VUECON/vu00-w13.pdf
    File Function: Revised version, 2000
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    Citations

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    Cited by:

    1. Parsley, David & Wei, Shang-Jin, 2001. "Limiting Currency Volatility to Stimulate Goods Market Integration: a Price-Based Approach," CEPR Discussion Papers 2958, C.E.P.R. Discussion Papers.
    2. Parsley, David C. & Wei, Shang-Jin, 2001. "Explaining the border effect: the role of exchange rate variability, shipping costs, and geography," Journal of International Economics, Elsevier, vol. 55(1), pages 87-105, October.
    3. Yuriy Gorodnichenko & Linda Tesar, 2005. "A Re-Examination of the Border Effect," Working Papers 546, Research Seminar in International Economics, University of Michigan.
    4. James E. Anderson & Eric van Wincoop, 2004. "Trade Costs," Journal of Economic Literature, American Economic Association, vol. 42(3), pages 691-751, September.
    5. Martin Berka, 2009. "Nonlinear Adjustment in Law of One Price Deviations and Physical Characteristics of Goods," Review of International Economics, Wiley Blackwell, vol. 17(1), pages 51-73, February.
    6. Weber, Axel A. & Beck, Guenter, 2003. "How wide are European borders? On the integration effects of monetary unions," CFS Working Paper Series 2001/07, Center for Financial Studies (CFS).
    7. Marios Zachariadis, 2002. "Productivity and Prices in Europe: Micro-Evidence for the Period 1975 to 1990," Departmental Working Papers 2002-12, Department of Economics, Louisiana State University.
    8. Salvador Gil-Pareja & Simón Sosvilla-Rivero, 2004. "Export market integration in the European Union," Journal of Applied Economics, Universidad del CEMA, vol. 7, pages 271-301, November.
    9. Beck, Günter W., 2003. "Nominal exchange rate regimes and relative price dispersion: On the importance of nominal exchange rate volatility for the width of the border," CFS Working Paper Series 2003/45, Center for Financial Studies (CFS).
    10. David Parsley Shang-Jin Wei, 2002. "Currency Arrangements And Goods Market Integration: A Price Based Approach," International Finance 0211004, EconWPA.

    More about this item

    JEL classification:

    • F00 - International Economics - - General - - - General
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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