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

Mario Crucini (), Mototsugu Shintani and Takayuki Tsuruga

No 1120, Vanderbilt University Department of Economics Working Papers from Vanderbilt University Department of Economics

Abstract: We introduce the real exchange rate volatility curve as a useful device to understand the relationship between price stickiness and the fluctuations in Law of One Price deviations. 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 US-European real exchange rate data and frequency of price changes, we estimate the volatility curve and find the predominance of real effects over nominal effects. 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)
Date: 2010-06
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http://www.accessecon.com/pubs/VUECON/vu11-w20.pdf First version, June 2010 (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:van:wpaper:1120

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