Accounting for U.S. Real Exchange Rate Changes

55 Pages Posted: 9 Jul 2000 Last revised: 30 Sep 2010

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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Date Written: December 1995

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 essentially none of the movement of U.S. real exchange rates at any horizon. Only for one crude measure, which uses the aggregate producer price index as an index of traded goods prices, do non-traded goods prices seem to account for more than a tiny portion of real exchange rate changes. 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.

Suggested Citation

Engel, Charles M., Accounting for U.S. Real Exchange Rate Changes (December 1995). NBER Working Paper No. w5394. Available at SSRN: https://ssrn.com/abstract=225455

Charles M. Engel (Contact Author)

University of Wisconsin - Madison - Department of Economics ( email )

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University of Washington - Department of Economics ( email )

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