Remoteness and Real Exchange Rate Volatility
21 Pages Posted: 6 Jan 2006
Date Written: January 2005
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