External rebalancing is not just an exporters' story: real exchange rates, the non-tradable sector and the euro

Ruscher, Eric and Wolff, Guntram B. (2009): External rebalancing is not just an exporters' story: real exchange rates, the non-tradable sector and the euro.

Abstract

Global and European trade balances have seen strong divergences combined with strong movements in the exchange rate. Trade balances and real effective exchange rates are related. Using different measures of the real effective exchange rate, we show that this long-run link hinges on the relative price of non-tradable to tradable goods and services in relation to their trading partners. An improvement in the trade balance is associated with a fall in the relative price of non-tradable goods and services. The elimination of nominal exchange rates with the euro does not change these relationships. Government consumption increases the relative price of nontradable goods. The results highlight the importance of internal price adjustments for external balances, a point frequently overlooked in policy debates.

• Item Type: MPRA Paper
• Language: English
• Keywords: real exchange rate, non-tradable sector, euro
• Subjects: F - International Economics > F3 - International Finance > F32 - Current Account Adjustment ; Short-Term Capital Movements; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics; F - International Economics > F3 - International Finance > F31 - Foreign Exchange

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