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Author: Mario J. Crucini
Publisher:
ISBN:
Category : Economics
Languages : en
Pages : 40
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Book Description
The classical dichotomy predicts that all of the time series variance in the aggregate real exchange rate is accounted for by non-traded goods in the CPI basket because traded goods obey the Law of One Price. In stark contrast, Engel (1999) found that traded goods had comparable volatility to the aggregate real exchange rate. Our work reconciles these two views by successfully applying the classical dichotomy at the level of intermediate inputs into the production of final goods using highly disaggregated retail price data. Since the typical good found in the CPI basket is about equal parts traded and non-traded inputs, we conclude that the classical dichotomy applied to intermediate inputs restores its conceptual value.
Author: Mario J. Crucini
Publisher:
ISBN:
Category : Economics
Languages : en
Pages : 40
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Book Description
The classical dichotomy predicts that all of the time series variance in the aggregate real exchange rate is accounted for by non-traded goods in the CPI basket because traded goods obey the Law of One Price. In stark contrast, Engel (1999) found that traded goods had comparable volatility to the aggregate real exchange rate. Our work reconciles these two views by successfully applying the classical dichotomy at the level of intermediate inputs into the production of final goods using highly disaggregated retail price data. Since the typical good found in the CPI basket is about equal parts traded and non-traded inputs, we conclude that the classical dichotomy applied to intermediate inputs restores its conceptual value.
Author:
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Book Description
Author: Mario John Crucini
Publisher:
ISBN:
Category : Foreign exchange rates
Languages : en
Pages : 36
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Book Description
"The classical dichotomy predicts that all of the time-series variance in the aggregate realexchange rate is accounted for by non-traded goods in the consumer price index (CPI)basket because traded goods obey the Law of One Price. In stark contrast, Engel (1999)claimed the opposite: that traded goods accounted for all of the variance. Using micro-data and recognizing that final good prices include both the cost of the goods themselves and local, non-traded inputs into retail such as labor and retail space, our work re-establishes the conceptual value of the classical dichotomy. We also carefully show the role of aggregation, consumption expenditure weighting and assignment of covariance terms in the differences between our findings and those of Engel"--Abstract, p. ii.
Author: Charles Engel
Publisher:
ISBN:
Category : Consumer goods
Languages : en
Pages : 68
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Book Description
This study measures the proportion of U.S. real exchange rate movements that can be accounted for by movements in the relative prices of non-traded goods. The decomposition is done at all possible horizons that the data allow -- from one month up to thirty years. The accounting is performed with five different measures of non-traded goods prices and real exchange rates, for exchange rates of the U.S. relative to a number of other high income countries in each case. The outcome is surprising -- relative prices of non-traded goods appear to account for essentially none of the movement of U.S. real exchange rates at any horizon. Only for one crude measure, which uses the aggregate producer price index as an index of traded goods prices, do non-traded goods prices seem to account for more than a tiny portion of real exchange rate changes. This pattern appears to be true even during fixed nominal exchange rate episodes. Special attention is paid to the U.S. real exchange rate with Japan. The possibility of mismeasurement of traded goods prices is explored.
Author: Mario John Crucini
Publisher:
ISBN:
Category : Foreign exchange rates
Languages : en
Pages : 60
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Book Description
Volatile and persistent real exchange rates are observed not only in aggregate series but also in the individual good level data. Kehoe and Midrigan (2007) recently showed that, under a standard assumption on nominal price stickiness, empirical frequencies of micro price adjustment cannot replicate the time-series properties of the law-of-one-price deviations. We extend their sticky price model by combining good specific price adjustment with information stickiness in the sense of Mankiw and Reis (2002). Under a reasonable assumption on the money growth process, we show that the model fully explains both persistence and volatility of the good-level real exchange rates. Furthermore, our framework allows for multiple cities within a country. Using a panel of U.S.-Canadian city pairs, we estimate a dynamic price adjustment process for each 165 individual goods. The empirical result suggests that the dispersion of average time of information update across goods is comparable to that of average time of price adjustment.--Author's description
Author: Charles M. Engel
Publisher:
ISBN:
Category :
Languages : en
Pages : 0
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Book Description
This study measures the proportion of U.S. real exchange rate movements that can be accounted for by movements in the relative prices of nontraded goods. The decomposition is done at all possible horizons that the data allow--from one month up to 30 years. The accounting is performed with five different measures of nontraded-goods prices and real exchange rates, for exchange rates of the United States relative to a number of other high-income countries in each case. The outcome is surprising: relative prices of nontraded goods appear to account for almost none of the movement of U.S. real exchange rates. Special attention is paid to the U.S. real exchange rate with Japan. The possibility of mismeasurement of traded-goods prices is explored.
Author: Steve Brito
Publisher: International Monetary Fund
ISBN: 1484356349
Category : Business & Economics
Languages : en
Pages : 21
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Book Description
We show that the response of firm-level investment to real exchange rate movements varies depending on the production structure of the economy. Firms in advanced economies and in emerging Asia increase investment when the domestic currency weakens, in line with the traditional Mundell-Fleming model. However, in other emerging market and developing economies, as well as some advanced economies with a low degree of structural economic complexity, corporate investment increases when the domestic currency strengthens. This result is consistent with Diaz Alejandro (1963)—in economies where capital goods are mostly imported, a stronger real exchange rate reduces investment costs for domestic firms.
Author: Federico Grinberg
Publisher:
ISBN:
Category :
Languages : en
Pages : 108
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Book Description
In these essays, I examine exchange rates and prices in the context of a small open economy. My first chapter is an empirical study of the behavior of nominal and real exchange rates in Mexico in the last 20 years. I present facts for exchange rate pass-through to prices, using both aggregate prices and CPI micro-data. I structure the evidence in two sets of facts that highlight the importance of real shocks and monetary regime in explaining changing patterns of aggregate prices and the CPI micro data. The first set shows that the nominal and real exchange rates have a strong co-movement at short and medium run horizons. Second, real exchange rate movements are mostly explained by changes in relative prices between `at the dock' prices and retail prices. Third, there is a large nominal exchange rate shock, the reason behind the incomplete exchange rate pass-through and the increase in the real exchange rate is not a slow price adjustment of goods that are actually traded, but a less-than-proportional adjustment of retail prices. The second set of facts analyzes the behavior of individual prices used to compute the CPI. First, there is a positive correlation between the fraction of prices that adjust per period (i.e., the frequency of price adjustment) and the level of inflation. Second, this correlation and the role of these changes in the fraction of adjusting prices in inflation is mostly explained by the exchange rate pass through after the 1994 large currency devaluation episode. In the second chapter I study the role of nominal price rigidities in accounting for low CPI inflation after large currency depreciations. Using a small open economy model with menu-cost nominal frictions calibrated to micro data from Mexico's Consumer Price Index, I find that in episodes of large depreciations, the effects of nominal rigidities in retail prices are quantitatively small and short-lived. The incomplete exchange rate pass-through to consumer prices is largely a result of a fall in real wages caused by negative real shocks and nominal stickiness in wages. In my third chapter I present a model of a small open economy subject both to a collateral constraint and downward rigidity in wages. These constraints will interact generating external shocks amplification and, in the presence of a currency peg regime, it also generates unemployment. This can be seen as an example that captures two main themes for small open economies: real exchange rigidities and consumption volatility. The contributions of my chapter are twofold. First, I show how financial amplification effects caused by `over borrowing can generate high unemployment rates without resorting to extreme wage rigidity. Second, it shows that the exchange rate policy faces a tradeoff between unemployment and tradable consumption when the collateral constraint binds. These two insights reflect the tradeoff of maintaining a currency peg during a crises: higher unemployment or an amplification of financial amplification of shocks.
Author: Mr. Haroon Mumtaz
Publisher: International Monetary Fund
ISBN: 1451895534
Category : Business & Economics
Languages : en
Pages : 43
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Book Description
We show the importance of a dynamic aggregation bias in accounting for the PPP puzzle. We prove that established time-series and panel methods substantially exaggerate the persistence of real exchange rates because of heterogeneity in the dynamics of disaggregated relative prices. When heterogeneity is properly taken into account, estimates of the real exchange rate half-life fall dramatically, to little more than one year, or significantly below Rogoff''s "consensus view" of three to five years. We show that corrected estimates are consistent with plausible nominal rigidities, thus, arguably, solving the PPP puzzle.
Author: Ronald MacDonald
Publisher: International Monetary Fund
ISBN:
Category : Business & Economics
Languages : en
Pages : 60
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Book Description
This paper presents a reduced-form model of the real exchange rate. Using multilateral cointegration methods, the model is implemented for the real effective exchange rates of the dollar, the mark, and the yen, over the period 1974-1993. In contrast to much other research using real exchange rates, there is evidence of significant and sensible long-run relationships for a simplified version as well as for the full version of the model. The estimated long-run relationships are used to produce dynamic equations, which outperform a random walk and produce sensible dynamic patterns in the context of an impulse response analysis.
