The real exchange rate as the relative price of nontradables in terms of tradables: theoretical investigation and empirical study on French data

Céline Allard-Prigent, Hélène Guilmeau and Alain Quinet
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Céline Allard-Prigent: INSEE - Institut national de la statistique et des études économiques (INSEE)
Hélène Guilmeau: ENSAE - Ecole Nationale de la Statistique et de l'Analyse Economique - Ecole Nationale de la Statistique et de l'Analyse Economique
Alain Quinet: DP - Direction de la Prévision - Ministère de l'Economie des Finances et de l'Industrie

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Abstract: Large fluctuations in both nominal and real parities between G7 countries raise the issue of their determinants. This paper offers a formal description of a model of the real exchange rate, defined as the relative price of nontradables in terms of tradables, explicitly based on microeconomic optimization. Our approach relies on a version of the general equilibrium model first presented by Obsfeld-Rogoff (1996). But we enrich the model by introducing monopolistic competition in the nontradables sector. This allows for demand factors to influence the real exchange rate in the long run. Our results on French data do not corroborate the Obsfeld-Rogoff supply-side model. However, they provide some support for the extended version of the model: a cointegration relationship can be found between the real exchange rate, sectoral productivities and the « world » real interest rate, once public expenditure is also taken into account

Keywords: Sectoral Inflation; Productivity; Cointegration Relationship; Public Spending; Real Exchange Rate; Relation de cointégration; inflation sectorielle; taux de change réel; Productivité (search for similar items in EconPapers)
Date: 2000-04
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