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

C. Allard-Prigent, H. Guilmeau and A. Quinet
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C. Allard-Prigent: Insee
H. Guilmeau: Ensae
A. Quinet: Direction de la Prévision

Documents de Travail de l'Insee - INSEE Working Papers from Institut National de la Statistique et des Etudes Economiques

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: Productivity; Real Exchange Rate; Sectoral Inflation; Public Spending; Cointegration Relationship (search for similar items in EconPapers)
JEL-codes: D40 F41 O33 (search for similar items in EconPapers)
Date: 2000
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Citations: View citations in EconPapers (4)

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