EconPapers    
Economics at your fingertips  
 

Real Exchange Rate Volatility and the Price of Nontradable Goods in Economies Prone to Sudden Stops

Enrique Mendoza

Economía Journal, 2005, vol. Volume 6 Number 1, issue Fall 2005, 103-148

Abstract: The dominant view in the empirical literature on exchange rates is that the high variability of real exchange rates is due to movements in exchange-rate-adjusted prices of tradable goods. This paper shows that this dominant view does not hold in Mexican data for the periods in which the country had managed exchange rate regimes. Variance analysis of a 30-year sample of monthly data shows that movements in the price of nontradables relative to tradables account for up to 70 percent of the variability of the real exchange rate during these periods. The paper proposes a model in which this stylized fact, and the Sudden Stops that accompanied the collapse of Mexico's managed exchange rates, could result from an endogenous amplification mechanism operating via nontradables prices in economies with dollarized liabilities and credit constraints. The key feature of this mechanism is Irving Fisher's debt-deflation process. Numerical evaluation suggests that the Fisherian deflation effects on consumption, the current account, and relative prices dwarf those induced by the standard balance sheet effect typical of the Sudden Stops literature.

Keywords: Real effective exchange rates; Mexico; Dollarization; Price adjustments (search for similar items in EconPapers)
JEL-codes: F30 F41 G11 (search for similar items in EconPapers)
Date: 2005
References: Add references at CitEc
Citations: View citations in EconPapers (83)

Downloads: (external link)
http://www.cid.harvard.edu/Economia/contents.htm

Related works:
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: https://EconPapers.repec.org/RePEc:col:000425:008658

Access Statistics for this article

More articles in Economía Journal from The Latin American and Caribbean Economic Association - LACEA Contact information at EDIRC.
Bibliographic data for series maintained by LACEA ().

 
Page updated 2025-03-19
Handle: RePEc:col:000425:008658