Revisiting the Importance of Non-Tradable Goods' Prices in Cyclical Real Exchange Rate Fluctuations

Arbeitspapier

In an influential paper Engel (1999. Accounting for U.S. Real Exchange Rate Changes, Journal of Political Economy 107, 507-538) argues that essentially all the fluctuations in the real exchange rate can be attributed to fluctuations in the relative price of traded goods, and that only a small part of the fluctuations can be attributed to changes in the relative price of non-tradables. We instead decompose the real exchange rate into three components: the relative price of traded goods at-the-dock, the difference in the relative price of non-traded to traded goods and the difference in the wedge between retail prices of traded goods and the prices of traded goods at-the-dock. Using data on US bilateral real exchange rates we find that the fluctuations in the relative wedge between retail prices and traded goods prices at-the-dock account for on average between 30 and 70 percent of the movements in the real exchange rate. These findings suggest that the relationship between traded goods prices at-the-dock and retail prices of traded goods is key to understanding real exchange rate fluctuations.

Object Details

• ISBN: 978-82-7553-486-4
• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Working Paper ; No. 2009/03

Classification and Topics

• Classification: Wirtschaft ; Foreign Exchange ; Open Economy Macroeconomics
• Subject: real exchange rates

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Bache, Ida Wolden ; Næss, Kjersti ; Sveen, Tommy
• Event: Veröffentlichung
• (who): Norges Bank
• (where): Oslo
• (when): 2009

Further information

• Handle: http://hdl.handle.net/10419/209919
• Last update: 10.03.2025, 11:44 AM CET