The origin of the law of one price deviations: Insights from the good-level real exchange rate volatility

Fumitaka Nakamura

Journal of International Money and Finance, 2022, vol. 128, issue C

Abstract: What is the origin of the law of one price deviation? To address this issue, this paper exploits the properties of good-level real exchange rate (RER) volatility; nominal (real) shocks predict the positive (negative) correlation between price stickiness and volatility. Using the US and 25 European countries, we estimate the contribution of each shock based on a two-country model in local currency pricing and the empirical analysis. The results indicate that the weighted average contribution of nominal shocks to the overall good-level RER volatility is 71%.

Keywords: Real exchange rate; The law of one price; Local currency pricing (search for similar items in EconPapers)
JEL-codes: E31 E52 F31 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:128:y:2022:i:c:s0261560622001206

DOI: 10.1016/j.jimonfin.2022.102717

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