The Importance of Nontradable Goods' Prices in Cyclical Real Exchange Rate Fluctuations

Abstract

Changes in the price of nontradable goods relative to tradable goods account for roughly 50 percent of the cyclical movements in real exchange rates.J.E.L. Classification: F31 * UCLA.

Financial Frictions and Optimal Monetary Policy in an Open Economy

“…Stockman and Tesar, 1995) and real exchange rate volatility in particular (e.g. Burstein, Neves, and Rebelo, 2003;Burstein, Eichenbaum, and Rebelo, 2006;Dotsey and Duarte, 2008). As shown for example by Duarte and Obstfeld (2008) and Faia and Monacelli (2008), real exchange rate volatility has also strong implications for monetary policy.…”

Disaggregating Real Exchange Rate Dynamics: A Structural Approach

“…the law of one price gap [ N Ex +P CP I P T M ; if one subtracts and adds the import price to rer T . 10 The above decomposition clari…es that a fall in the price of the home-produced tradable a¤ects the real exchange rate through all three relative prices, the …rst leading to a real depreciation and the latter two triggering an appreciation. In the aggregate, the direction of the real exchange rate response depends on which relative price e¤ect dominates.…”

Global Imbalances and Imported Disinflation in the Euro Area

“…Furthermore, our model predicts that, in the long run, the real exchange rate should depreciate when productivity increases, contrary to models including Balassa-Samuelson effects. This contrasting prediction results from the monopolistic competition between goods, without any distinction between tradable and non-tradable goods contrary to Burstein et al (2006). Here, we follow most DSGE models in open economy framework.…”