Understanding Real Exchange Rate Movements with Trade in Intermediate Products

David Parsley and Helen Popper

MPRA Paper from University Library of Munich, Germany

Abstract: We suggest it may be "too easy" to attribute real exchange rate movements to law of one price deviations. We show that it is immaterial whether one uses seemingly traded goods, nontraded goods, or even just a single, unimportant consumer good, say beer. The ease of attributing the variation to any such deviations is explained using a model with intermediate goods trade. In the model, the stage of production determines the traded/nontraded distinction. We find empirical substantiation for the model: law of one price deviations lose explanatory power; and - defined appropriately in terms of intermediate goods - relative prices matter.

Keywords: Real Exchange Rates; PPP; MSE decomposition (search for similar items in EconPapers)
JEL-codes: F3 F4 (search for similar items in EconPapers)
Date: 2009-02
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Citations: View citations in EconPapers (4)

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Related works:
Journal Article: UNDERSTANDING REAL EXCHANGE RATE MOVEMENTS WITH TRADE IN INTERMEDIATE PRODUCTS (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:21117

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