Price Rigidities and Relative PPP

60 Pages Posted: 30 May 2018 Last revised: 13 Nov 2024

See all articles by Julio Blanco

Julio Blanco

University of Michigan at Ann Arbor - Department of Economics

Javier Cravino

University of Michigan; NBER

Date Written: May 2018

Abstract

We measure the proportion of real exchange rate movements accounted for by cross-country movements in relative reset prices (prices that changed since the previous period) using CPI microdata for five countries. Relative reset prices account for almost the totality of the real exchange rate movements. This is at odds with the predictions of most workhorse sticky price models used to generate volatile and persistent real exchange rates. In these models relative reset prices are sluggish because relative wages are either sluggish or mean revert quickly. We show that models where movements in relative wages are persistent and track the nominal exchange rate do replicate the empirical properties of both the real exchange rate and of relative reset prices.

Suggested Citation

Blanco, Julio and Cravino, Javier, Price Rigidities and Relative PPP (May 2018). NBER Working Paper No. w24655, Available at SSRN: https://ssrn.com/abstract=3185927

Julio Blanco (Contact Author)

University of Michigan at Ann Arbor - Department of Economics ( email )

Ann Arbor, MI
United States

Javier Cravino

University of Michigan ( email )

611 Tappan Street
Ann Arbor, MI 48109-1220
United States

NBER ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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