Do Sticky Prices Increase Real Exchange Rate Volatility at the Sector Level?

Mario Crucini (), Mototsugu Shintani and Takayuki Tsuruga

Discussion papers from Graduate School of Economics Project Center, Kyoto University

Abstract: We introduce the real exchange rate volatility curve as a useful device to understand the role of price stickiness in accounting for deviations from the Law of One Price at the sector level. In the presence of both nominal and real shocks, the theory predicts that the real exchange rate volatility curve is a U-shaped function of the degree of price stickiness. Using sector-level European real exchange rate data and frequency of price changes, we estimate the volatility curve. The results are consistent with the predominance of real effects over nominal effects. Nonparametric analysis suggests the curve is convex and negatively sloped over the majority of its range. Good-by- good variance decompositions show that the relative contribution of nominal shocks is smaller at the sector level than what previous studies have found at the aggregate level. We conjecture that this is due to significant averaging out of good-specific real microeconomic shocks in the process of aggregation.

Keywords: Real exchange rates; Law of One Price; Sticky prices; Nonparametric test for monotonicity (search for similar items in EconPapers)
JEL-codes: D40 E31 F31 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2010-07
New Economics Papers: this item is included in nep-mac and nep-opm
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http://www.econ.kyoto-u.ac.jp/projectcenter/Paper/e-10-004.pdf (application/pdf)

Related works:
Journal Article: Do sticky prices increase real exchange rate volatility at the sector level? (2013)
Working Paper: Do Sticky Prices Increase Real Exchange Rate Volatility at the Sector Level? (2011)
Working Paper: Do Sticky Prices Increase Real Exchange Rate Volatility at the Sector Level? (2010)
Working Paper: Do Sticky Prices Increase Real Exchange Rate Volatility at the Sector Level? (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:kue:dpaper:e-10-004

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