Abstract

http://ssrn.com/abstract=904323
 
 

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Understanding Real Exchange Rate Movements with Trade in Intermediate Products


David C. Parsley


Vanderbilt University - Owen Graduate School of Management; Vanderbilt University

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.

Number of Pages in PDF File: 26

Keywords: Real Exchange Rates, PPP, MSE decomposition

JEL Classification: F3, F4

working papers series


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Date posted: August 12, 2006 ; Last revised: November 25, 2012

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 or http://dx.doi.org/10.2139/ssrn.904323

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)
Vanderbilt University ( 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 California 95053
United States
(408) 554-6952 (Phone)
(408) 554-2331 (Fax)
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