U.S. real exchange rate fluctuations and relative price fluctuations

Caroline Marie Betts and Timothy J. Kehoe ()

No 334, Staff Report from Federal Reserve Bank of Minneapolis

Abstract: This paper studies the relation between the United States? bilateral real exchange rate and the associated bilateral relative price of nontraded goods for five of its most important trade relationships. Traditional theory attributes fluctuations in real exchange rates to changes in the relative price of nontraded goods. We find that this relation depends crucially on the choice of price series used to measure relative prices and on the choice of trade partner. The relation is stronger when we measure relative prices using producer prices rather than consumer prices. The relation is stronger the more important is the trade relationship between the United States and a trade partner. Even in cases where there is a strong relation between the real exchange rate and the relative price of nontraded goods, however, a large fraction of real exchange rate fluctuations is due to deviations from the law of one price for traded goods.

Keywords: Foreign exchange rates; Prices; International trade; International finance; Monetary policy (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ifn
Date: 2004
View list of references View citations in EconPapers

Published in Journal of Monetary Economics> (Vol. 53, No. 7, October 2006, pp. 1297-1326)

Downloads: (external link)
http://minneapolisfed.org/research/sr/sr334.pdf (application/pdf)

Related works:
Working Paper: U.S. Real Exchange Rate Fluctuations and Relative Price Fluctuations (2005)
Working Paper: U.S. Real Exchange Rate Fluctuations and Relative Price Fluctuations (2004)
Journal Article: U.S. real exchange rate fluctuations and relative price fluctuations (2006)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:fip:fedmsr:334

Ordering information: This working paper can be ordered from
http://www.minneapolisfed.org/pubs/

Access Statistics for this paper

More papers in Staff Report from Federal Reserve Bank of Minneapolis
Contact information at EDIRC.
Series data maintained by Diane Rosenberger ().