Revisiting the importance of non-tradable goods' prices in cyclical real exchange rate fluctuations

Ida Wolden Bache, Kjersti Næss and Tommy Sveen ()
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Ida Wolden Bache: Norges Bank (Central Bank of Norway)
Kjersti Næss: Norges Bank (Central Bank of Norway)

No 2009/03, Working Paper from Norges Bank

Abstract: In an influential paper Engel (1999. Accounting for U.S. Real Exchange Rate Changes, Journal of Political Economy 107, 507-538) argues that essentially all the flctuations in the real exchange rate can be attributed to fluctuations in the relative price of traded goods, and that only a small part of the fluctuations can be attributed to changes in the relative price of non-tradables. We instead decompose the real exchange rate into three components: the relative price of traded goods at-the-dock, the difference in the relative price of non-traded to traded goods and the difference in the wedge between retail prices of traded goods and the prices of traded goods at-the-dock. Using data on US bilateral real exchange rates we find that the fluctuations in the relative wedge between retail prices and traded goods prices at-the-dock account for on average between 30 and 70 percent of the movements in the real exchange rate. These findings suggest that the relationship between traded goods prices at-the-dock and retail prices of traded goods is key to understanding real exchange rate fluctuations.

Keywords: Real; exchange; rates (search for similar items in EconPapers)
JEL-codes: F31 F41 (search for similar items in EconPapers)
Pages: 17 pages
Date: 2009-01-30
New Economics Papers: this item is included in nep-cba, nep-ifn and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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https://www.norges-bank.no/en/news-events/news-pub ... apers/2009/WP-20093/

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Journal Article: Revisiting the importance of non-tradable goods' prices in cyclical real exchange rate fluctuations (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:bno:worpap:2009_03

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