Price Rigidities and the Relative PPP

Julio Blanco and Javier Cravino
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Julio Blanco: University of Michigan

No 346, 2018 Meeting Papers from Society for Economic Dynamics

Abstract: We measure the proportion of real exchange rate movements accounted for by cross-country movements in relative reset prices (prices that changed since the previous period) using CPI microdata for the UK, Austria and Mexico. Relative reset prices account for almost all of the real exchange rate movements in the data. This is at odds with the predictions of Sticky Price Open Economy models with complete markets, which generate volatile and persistent real exchange rates but not through movements in relative reset prices. We show that incomplete markets models featuring UIP deviations are much closer to replicating the empirical decomposition at low frequencies.

Date: 2018
New Economics Papers: this item is included in nep-dge, nep-mon and nep-opm
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Citations: View citations in EconPapers (3)

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Working Paper: Price Rigidities and Relative PPP (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed018:346

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