Price rigidities and the relative PPP

Andrés Blanco and Javier Cravino

Journal of Monetary Economics, 2020, vol. 116, issue C, 104-116

Abstract: We measure the proportion of real exchange rate movements accounted for by cross-country movements in relative reset prices (prices that changed since the previous period) using CPI microdata for five countries. Relative reset prices account for almost all of the real exchange rate movements. This is a challenge for most workhorse sticky price models used to generate volatile and persistent real exchange rates, in which relative reset prices are sluggish. Models where movements in relative wages are persistent and track the nominal exchange rate do replicate both the empirical properties of the real exchange rate and of relative reset prices.

Keywords: PPP Puzzle; Real exchange rates; Price stickiness (search for similar items in EconPapers)
JEL-codes: F31 F41 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:116:y:2020:i:c:p:104-116

DOI: 10.1016/j.jmoneco.2019.09.010

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