Parsley, David and Popper, Helen (2009): Understanding Real Exchange Rate Movements with Trade in Intermediate Products.
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We suggest it may be "too easy" to attribute real exchange rate movements to law of one price deviations. We show that it is immaterial whether one uses seemingly traded goods, nontraded goods, or even just a single, unimportant consumer good, say beer. The ease of attributing the variation to any such deviations is explained using a model with intermediate goods trade. In the model, the stage of production determines the traded/nontraded distinction. We find empirical substantiation for the model: law of one price deviations lose explanatory power; and - defined appropriately in terms of intermediate goods - relative prices matter.
|Item Type:||MPRA Paper|
|Original Title:||Understanding Real Exchange Rate Movements with Trade in Intermediate Products|
|Keywords:||Real Exchange Rates, PPP, MSE decomposition|
|Subjects:||F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance
F - International Economics > F3 - International Finance
|Depositing User:||David C. Parsley|
|Date Deposited:||07. Mar 2010 01:16|
|Last Modified:||14. Feb 2013 10:17|
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