Accounting for persistence and volatility of good-level real exchange rates: the role of sticky information

Mario Crucini (), Mototsugu Shintani and Takayuki Tsuruga

No 7, Globalization Institute Working Papers from Federal Reserve Bank of Dallas

Abstract: Volatile and persistent real exchange rates are observed not only in aggregate series but also on 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.

JEL-codes: D40 E31 F31 (search for similar items in EconPapers)
Pages: 52 pages
Date: 2008
New Economics Papers: this item is included in nep-cba, nep-ifn, nep-mac and nep-opm
Note: Published as: Crucini, Mario E., Motosugu Shintani and Takayuki Tsuruga (2010), "Accounting for Persistence and Volatility of Good-Level Real Exchange Rates: The Role of Sticky Information," Journal of International Economics 81 (1): 48-60.
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Citations: View citations in EconPapers (9)

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Related works:
Journal Article: Accounting for persistence and volatility of good-level real exchange rates: The role of sticky information (2010)
Working Paper: Accounting for Persistence and Volatility of Good-level Real Exchange Rates: The Role of Sticky Information (2008)
Working Paper: Accounting for Persistence and Volatility of Good-Level Real Exchange Rates: The Role of Sticky Information (2008)
Working Paper: Accounting for Persistence and Volatility of Good-Level Real Exchange Rates: The Role of Sticky Information (2008)
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