Accounting for Persistence and Volatility of Good-level Real Exchange Rates: The Role of Sticky Information

Mario Crucini (), Mototsugu Shintani and Takayuki Tsuruga

No 08-E-05, IMES Discussion Paper Series from Institute for Monetary and Economic Studies, Bank of Japan

Abstract: Volatile and persistent real exchange rates are observed not only in aggregate series but also in the individual good level data. Kehoe and Midrigan (2007) recently showed that, under a standard assumption on nominal price stickiness, empirical frequencies of micro price adjustment cannot replicate the time-series properties of the law- of-one-price deviations. We extend their sticky price model by combining good specific price adjustment with information stickiness in the sense of Mankiw and Reis (2002). Under a reasonable assumption on the money growth process, we show that the model fully explains both persistence and volatility of the good-level real exchange rates. Furthermore, our framework allows for multiple cities within a country. Using a panel of U.S.- Canadian city pairs, we estimate a dynamic price adjustment process for each 165 individual goods. The empirical result suggests that the dispersion of average time of information update across goods is comparable to that of average time of price adjustment.

Keywords: Good-level Real Exchange Rates; Law of One Price; Sticky Information; Dynamic Panel (search for similar items in EconPapers)
JEL-codes: D40 E31 F31 (search for similar items in EconPapers)
Date: 2008-03
New Economics Papers: this item is included in nep-cba, nep-ifn and nep-mac
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Citations: View citations in EconPapers (9)

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Related works:
Journal Article: Accounting for persistence and volatility of good-level real exchange rates: The role of sticky information (2010)
Working Paper: Accounting for persistence and volatility of good-level real exchange rates: the role of sticky information (2008)
Working Paper: Accounting for Persistence and Volatility of Good-Level Real Exchange Rates: The Role of Sticky Information (2008)
Working Paper: Accounting for Persistence and Volatility of Good-Level Real Exchange Rates: The Role of Sticky Information (2008)
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