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Revisiting the importance of non-tradable goods' prices in cyclical real exchange rate fluctuations

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  • Bache, Ida Wolden
  • Sveen, Tommy
  • Torstensen, Kjersti Næss

Abstract

In an influential paper Engel (1999) argues that essentially all the fluctuations in the real exchange rate can be attributed to fluctuations in the relative price of traded goods, and that only a small part of the fluctuations can be attributed to changes in the relative price of non-tradables. We revisit this important issue and our main finding suggests that the relative distribution wedge, i.e. the relationship between traded goods' prices at-the-dock and the retail prices of those goods, is key to understanding real exchange rate fluctuations. Importantly, our results suggest that variations in the relative wedge are driven by fluctuations in mark-ups and not in distribution costs.

Suggested Citation

  • Bache, Ida Wolden & Sveen, Tommy & Torstensen, Kjersti Næss, 2013. "Revisiting the importance of non-tradable goods' prices in cyclical real exchange rate fluctuations," European Economic Review, Elsevier, vol. 57(C), pages 98-107.
    • Handle: RePEc:eee:eecrev:v:57:y:2013:i:c:p:98-107
    DOI: 10.1016/j.euroecorev.2012.10.007
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    1. Crucini, Mario J. & Landry, Anthony, 2019. "Accounting for real exchange rates using micro-data," Journal of International Money and Finance, Elsevier, vol. 91(C), pages 86-100.
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    2. Maria Eleftheriou & Nikolas A. Müller-Plantenberg, 2018. "The Purchasing Power Parity Fallacy: Time to Reconsider the PPP Hypothesis," Open Economies Review, Springer, vol. 29(3), pages 481-515, July.
    3. P. Jacob, 2010. "Disaggregating Real Exchange Rate Dynamics: A Structural Approach," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 10/655, Ghent University, Faculty of Economics and Business Administration.

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    More about this item

    Keywords

    Real exchange rates;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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