Accounting for U.S. Real Exchange Rate Changes

University of Washington Economics Working Paper

49 Pages Posted: 25 May 1999

See all articles by Charles M. Engel

Charles M. Engel

University of Wisconsin - Madison - Department of Economics; National Bureau of Economic Research (NBER); University of Washington - Department of Economics

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Abstract

This study measures the proportion of U.S. real exchange rate movements that can be accounted for by movements in the relative prices of non-traded goods. The decomposition is done at all possible horizons that the data allow--from one month up to thirty years. The accounting is performed with five different measures of non-traded goods prices and real exchange rates, for exchange rates of the U.S. relative to a number of other high income countries in each case. The outcome is surprising--relative prices of non-traded goods appear to account for almost none of the movement of U.S. real exchange rates. This pattern appears to be true even during fixed nominal exchange rate episodes. Special attention is paid to the U.S. real exchange rate with Japan. The possibility of mismeasurement of traded goods prices is explored.

JEL Classification: F3, F4

Suggested Citation

Engel, Charles M., Accounting for U.S. Real Exchange Rate Changes. University of Washington Economics Working Paper. Available at SSRN: https://ssrn.com/abstract=148259 or http://dx.doi.org/10.2139/ssrn.148259

Charles M. Engel (Contact Author)

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