A model of international cities: implications for real exchange rates

Mario Crucini () and Hakan Yilmazkuday

No 38, Globalization Institute Working Papers from Federal Reserve Bank of Dallas

Abstract: We develop a model of cities each inhabited by two agents, one specializing in manufacturing, the other in retail distribution. The distribution sector represents the physical transformation of all internationally traded goods from the factory gate to the final consumer. Using a panel of micro-prices at the city level, we decompose the cross-sectional variance of long-run LOP deviations into the fraction due to distribution costs, trade costs and a residual. For the median good, trade costs account for 50 percent of the variance, distribution costs account for 10 percent with 40 percent of the variance unexplained. Since the sample of items in the data are heavily skewed toward traded goods, we also decompose the variance based on the median good on an expenditure-weighted basis. Now the tables turn, with distribution costs accounting for 43 percent, trade costs 36 percent and 21 percent of the variance unexplained.

Keywords: Foreign exchange; Pricing (search for similar items in EconPapers)
Date: 2009
New Economics Papers: this item is included in nep-ifn, nep-opm and nep-ure
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Citations: View citations in EconPapers (14)

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Related works:
Working Paper: A Model of International Cities: Implications for Real Exchange Rates (2009)
Working Paper: A Model of International Cities: Implications for Real Exchange Rates (2009)
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