Distribution Costs and Real Exchange Rate Dynamics During Exchange-Rate-Based Stabilization

Burstein, Ariel T.; Neves, Joao C.; Rebelo, Sergio T.

Distribution Costs and Real Exchange Rate Dynamics During Exchange-Rate-Based Stabilization

CEPR Discussion Paper No. 2944

33 Pages Posted: 9 Oct 2001

See all articles by Ariel T. Burstein

Ariel T. Burstein

University of California, Los Angeles (UCLA) - Department of Economics

Joao C. Neves

Catholic University of Portugal (UCP) - Faculty of Economic Science and Business Studies

Sergio T. Rebelo

Northwestern University - Kellogg School of Management; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

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

Burstein, Ariel T. and das Neves, João Luís César and Tavares Rebelo, Sergio, Distribution Costs and Real Exchange Rate Dynamics During Exchange-Rate-Based Stabilization (September 2001). CEPR Discussion Paper No. 2944. Available at SSRN: https://ssrn.com/abstract=286485