Accounting for Real Exchange Rates Using Micro-Data

42 Pages Posted: 3 Feb 2012 Last revised: 4 Mar 2023

See all articles by Mario J. Crucini

Mario J. Crucini

Vanderbilt University - College of Arts and Science - Department of Economics; National Bureau of Economic Research (NBER)

Anthony Landry

Government of Canada - Bank of Canada

Date Written: February 2012

Abstract

The classical dichotomy predicts that all of the time series variance in the aggregate real exchange rate is accounted for by non-traded goods in the CPI basket because traded goods obey the Law of One Price. In stark contrast, Engel (1999) found that traded goods had comparable volatility to the aggregate real exchange rate. Our work reconciles these two views by successfully applying the classical dichotomy at the level of intermediate inputs into the production of final goods using highly disaggregated retail price data. Since the typical good found in the CPI basket is about equal parts traded and non-traded inputs, we conclude that the classical dichotomy applied to intermediate inputs restores its conceptual value.

Suggested Citation

Crucini, Mario J. and Landry, Anthony, Accounting for Real Exchange Rates Using Micro-Data (February 2012). NBER Working Paper No. w17812, Available at SSRN: https://ssrn.com/abstract=1998610

Mario J. Crucini (Contact Author)

Vanderbilt University - College of Arts and Science - Department of Economics ( email )

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Anthony Landry

Government of Canada - Bank of Canada ( email )