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The real exchange rate as the relative price of nontradables in terms of tradables: theoretical investigation and empirical study on French data

Author

Listed:
  • C. ALLARD-PRIGENT

    (Insee)

  • H. GUILMEAU

    (Ensae)

  • A. QUINET

    (Direction de la Prévision)

Abstract

Large fluctuations in both nominal and real parities between G7 countries raise the issue of their determinants. This paper offers a formal description of a model of the real exchange rate, defined as the relative price of nontradables in terms of tradables, explicitly based on microeconomic optimization. Our approach relies on a version of the general equilibrium model first presented by Obsfeld-Rogoff (1996). But we enrich the model by introducing monopolistic competition in the nontradables sector. This allows for demand factors to influence the real exchange rate in the long run. Our results on French data do not corroborate the Obsfeld-Rogoff supply-side model. However, they provide some support for the extended version of the model: a cointegration relationship can be found between the real exchange rate, sectoral productivities and the « world » real interest rate, once public expenditure is also taken into account.

Suggested Citation

  • C. Allard-Prigent & H. Guilmeau & A. Quinet, 2000. "The real exchange rate as the relative price of nontradables in terms of tradables: theoretical investigation and empirical study on French data," Documents de Travail de l'Insee - INSEE Working Papers g2000-02, Institut National de la Statistique et des Etudes Economiques.
    • Handle: RePEc:nse:doctra:g2000-02
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    File URL: https://www.bnsp.insee.fr/ark:/12148/bc6p06zqr2s/f1.pdf
    File Function: Document de travail de la DESE numéro G2000-02
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    Citations

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    Cited by:

    1. Nanno Mulder & Anne-Laure Baldi, 2004. "The Impact of Exchange Rate Regimes on Real Exchange Rates: ABC and Mexico in the 1990s," Econometric Society 2004 Latin American Meetings 45, Econometric Society.
    2. Raphael Lafrogne-Joussier & Julien Martin & Isabelle Mejean, 2023. "Supply Shocks in Supply Chains: Evidence from the Early Lockdown in China," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 71(1), pages 170-215, March.
    3. M. Adam & O. Bonnet & E. Fize & T. Loisel & M. Rault & L. Wilner, 2023. "How does fuel demand respond to price changes? Quasi-experimental evidence based on high-frequency data," Documents de Travail de l'Insee - INSEE Working Papers 2023-17, Institut National de la Statistique et des Etudes Economiques.
    4. Hoarau, Jean-François, 2009. "L’approche microéconomique du taux de change réel d’équilibre : une revue de la littérature théorique," L'Actualité Economique, Société Canadienne de Science Economique, vol. 85(4), pages 403-436, décembre.

    More about this item

    Keywords

    Productivity; Real Exchange Rate; Sectoral Inflation; Public Spending; Cointegration Relationship;
    All these keywords.

    JEL classification:

    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes

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