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Understanding Real Exchange Rate Movements with Trade in Intermediate Products

David C. Parsley
Vanderbilt University - Owen Graduate School of Management

Helen Popper
Santa Clara University - Leavey School of Business - Economics Department


February 9, 2009


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

JEL Classifications: F3, F4

Working Paper Series

Date posted: August 12, 2006 ; Last revised: November 01, 2009

Suggested Citation

Parsley, David C. and Popper, Helen, Understanding Real Exchange Rate Movements with Trade in Intermediate Products (February 9, 2009). Available at SSRN: http://ssrn.com/abstract=904323


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Contact Information

David C. Parsley (Contact Author)
Vanderbilt University - Owen Graduate School of Management ( email )
401 21st Avenue South
Nashville, TN 37203
United States
615-322-0649 (Phone)
615-343-7177 (Fax)
Helen Popper
Santa Clara University - Leavey School of Business - Economics Department ( email )
500 El Camino Real
Santa Clara, CA 95053
United States
(408) 554-6952 (Phone)
(408) 554-2331 (Fax)
Feedback to SSRN (Beta)


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