Nontraded Goods, Market Segmentation, and Exchange Rates

Michael Dotsey and Margarida Duarte

Working Papers from University of Toronto, Department of Economics

Abstract: Empirical evidence suggests that movements in international relative prices are large and persistent. Nontraded goods, both in the form of final consumption goods and as an input into the production of final tradable goods, are an important aspect driving international relative price movements. In this paper we show that nontraded goods play an important role in the context of an otherwise standard open-economy macromodel. Our quantitative study with nontraded goods generates implications along several dimensions that are more closely in line with the data relative to the model that abstracts from nontraded goods. In addition, contrary to a large literature, standard alternative assumptions about the currency in which firms price their goods are virtually inconsequential for the properties of aggregate variables in our model, other than the terms of trade.

Keywords: exchange rates; nontraded goods; distribution services; incomplete asset markets. (search for similar items in EconPapers)
JEL-codes: F3 F41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-dge, nep-ifn, nep-mkt and nep-opm
Date: 2008-10-01
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Related works:
Working Paper: Nontraded Goods, Market Segmentation, and Exchange Rates (2007)
Working Paper: Nontraded goods, market segmentation, and exchange rates (2006)
Working Paper: Nontraded Goods, Market Segmentation, and Exchange Rates (2006)
Working Paper: Nontraded goods, market segmentation, and exchange rates (2006)
Journal Article: Nontraded goods, market segmentation, and exchange rates (2008)
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