Distribution Costs and Real Exchange Rate Dynamics During Exchange-Rate-Based Stabilization
33 Pages Posted: 9 Oct 2001
Date Written: September 2001
Abstract
This Paper studies the role played by distribution costs in shaping the behaviour of the real exchange rate during exchange-rate-based stabilizations. We document that distribution costs are very large for the average consumer good: the represent more than 40% of the retail price in the US and 60% of the retail price in Argentina. Distribution services require local labour and so they drive a natural wedge between retail prices in different countries. We show that introducing a distribution sector in an otherwise standard model of exchange-rate-based stabilizations dramatically improves its ability to rationalise observed real exchange rate dynamics.
Keywords: Real exchange rate, distribution, inflation, stabilization, fixed exchange rates
JEL Classification: F41
Suggested Citation: Suggested Citation
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