Real Exchange Rate Movements and the Relative Price of Non-Traded Goods

41 Pages Posted: 27 Oct 2008 Last revised: 13 Dec 2021

See all articles by Caroline Betts

Caroline Betts

University of Southern California - Department of Economics

Timothy J. Kehoe

University of Minnesota - Twin Cities - Department of Economics; National Bureau of Economic Research (NBER)

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Date Written: October 2008

Abstract

We study the quarterly bilateral real exchange rate and the relative price of non-traded to traded goods for 1225 country pairs over 1980-2005. We show that the two variables are positively correlated, but that movements in the relative price measure are smaller than those in the real exchange rate. The relation between the two variables is stronger when there is an intense trade relationship between two countries and when the variance of the real exchange rate between them is small. The relation does not change for rich/poor country bilateral pairs or for high inflation/low inflation country pairs. We identify an anomaly: The relation between the real exchange rate and relative price of non-traded goods for US/EU bilateral trade partners is unusually weak.

Suggested Citation

Betts, Caroline M. and Kehoe, Timothy J., Real Exchange Rate Movements and the Relative Price of Non-Traded Goods (October 2008). NBER Working Paper No. w14437, Available at SSRN: https://ssrn.com/abstract=1289671

Caroline M. Betts

University of Southern California - Department of Economics ( email )

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Timothy J. Kehoe (Contact Author)

University of Minnesota - Twin Cities - Department of Economics ( email )

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