The Relative Price of Nontraded Goods, Absorption and the Exchange Rate Policy: Chile 1974-1982
44 Pages Posted: 15 Feb 2006
Date Written: December 2, 1987
This paper examines the empirical effects of exchange rate policy and changes in absorption on the relative price of nontraded goods in Chile. Three alternative theories of relative-price determination in a developing economy are tested. These include purchasing power parity, sector specific factors, and sticky wages. The estimation results, obtained using both classical and Bayesian methods, favor the sticky wages theory. Thus, a devaluation will only have a lasting effect on the relative price of non-traded goods as long as wages are not fully indexed to the price level.
JEL Classification: 1211, 4313
Suggested Citation: Suggested Citation