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Real exchange rate movements and the relative price of non-traded goods

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  • Caroline M. Betts
  • Timothy J. Kehoe

Abstract

We study the quarterly bilateral real exchange rate and the relative price of non-traded to traded goods for 1225 country pairs over 1980?2005. We show that the two variables are positively correlated, but that movements in the relative price measure are smaller than those in the real exchange rate. The relation between the two variables is stronger when there is an intense trade relationship between two countries and when the variance of the real exchange rate between them is small. The relation does not change for rich/poor country bilateral pairs or for high inflation/low inflation country pairs. We identify an anomaly: The relation between the real exchange rate and relative price of non-traded goods for US/EU bilateral trade partners is unusually weak.

Suggested Citation

  • Caroline M. Betts & Timothy J. Kehoe, . "Real exchange rate movements and the relative price of non-traded goods," Staff Report, Federal Reserve Bank of Minneapolis.
    • Handle: RePEc:fip:fedmsr:415
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    References listed on IDEAS

    as
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    5. Caroline M. Betts & Timothy J. Kehoe, . "U.S. real exchange rate fluctuations and relative price fluctuations," Staff Report, Federal Reserve Bank of Minneapolis.
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    7. V. V Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2002. "Can Sticky Price Models Generate Volatile and Persistent Real Exchange Rates?," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 69(3), pages 533-563.
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