Remoteness and Real Exchange Rate Volatility

Bravo-Ortega, Claudio; di Giovanni, Julian

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Remoteness and Real Exchange Rate Volatility

IMF Working Paper No. 05/1

21 Pages Posted: 6 Jan 2006

See all articles by Claudio Bravo-Ortega

Claudio Bravo-Ortega

School of Business, Universidad Adolfo Ibañez

Federal Reserve Banks - Federal Reserve Bank of New York; Universitat Pompeu Fabra - Department of Economics and Business; Barcelona Graduate School of Economics (Barcelona GSE); CREI and Universitat Pompeu Fabra; Centre for Economic Policy Research (CEPR)

Date Written: January 2005

Abstract

This paper examines the impact of trade costs on real exchange rate volatility. The channel is examined by constructing a two-country Ricardian model of trade, based on the work of Dornbusch, Fischer, and Samuelson (1977), which shows that higher trade costs result in a larger nontradable sector. This, in turn, leads to higher real exchange rate volatility. We provide empirical evidence supporting the channel.

Keywords: Real exchange rate volatility, trade costs, comparative advantage

JEL Classification: F30, F40

Suggested Citation: Suggested Citation

Bravo-Ortega, Claudio and di Giovanni, Julian, Remoteness and Real Exchange Rate Volatility (January 2005). IMF Working Paper No. 05/1, Available at SSRN: https://ssrn.com/abstract=873684