U.S. Real Exchange Rate Fluctuations and Relative Price Fluctuations

52 Pages Posted: 8 Mar 2005

See all articles by Caroline Betts

Caroline Betts

University of Southern California - Department of Economics

Timothy J. Kehoe

University of Minnesota - Twin Cities - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: March 2004

Abstract

This paper studies the relation between the United States' bilateral real exchange rate and the associated bilateral relative price of nontraded goods for five of its most important trade relationships. Traditional theory attributes fluctuations in real exchange rates to changes in the relative price of nontraded goods. We find that this relation depends crucially on the choice of price series used to measure relative prices and on the choice of trade partner. The relation is stronger when we measure relative prices using producer prices rather than consumer prices. The relation is stronger the more important is the trade relationship between the United States and a trade partner. Even in cases where there is a strong relation between the real exchange rate and the relative price of nontraded goods, however, a large fraction of real exchange rate fluctuations is due to deviations from the law of one price for traded goods.

Suggested Citation

Betts, Caroline M. and Kehoe, Timothy J., U.S. Real Exchange Rate Fluctuations and Relative Price Fluctuations (March 2004). Available at SSRN: https://ssrn.com/abstract=678183 or http://dx.doi.org/10.2139/ssrn.678183

Caroline M. Betts (Contact Author)

University of Southern California - Department of Economics ( email )

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Timothy J. Kehoe

University of Minnesota - Twin Cities - Department of Economics ( email )

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United States
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National Bureau of Economic Research (NBER)

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