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

Eric Ruscher and Guntram Wolff

MPRA Paper from University Library of Munich, Germany

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.

Keywords: real exchange rate; non-tradable sector; euro (search for similar items in EconPapers)
JEL-codes: F31 F32 F41 (search for similar items in EconPapers)
Date: 2009-04
New Economics Papers: this item is included in nep-cba and nep-opm
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Citations: View citations in EconPapers (16)

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Working Paper: External rebalancing is not just an exporters' story: real exchange rates, the non-tradable sector and the euro (2009)
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