Real Exchange Rate Volatility and the Price of Nontradables in Sudden-Stop-Prone Economies
34 Pages Posted: 17 May 2006
There are 2 versions of this paper
Real Exchange Rate Volatility and the Price of Nontradables in Sudden-Stop-Prone Economies
Real Exchange Rate Volatility and the Price of Nontradables in Sudden-Stop-Prone Economies
Date Written: March 2006
Abstract
This paper shows that the dominant view that the high variability of real exchange rates is due to movements in exchange rate-adjusted prices of tradable goods does not hold for Mexican data for periods with a managed exchange rate. The relative price of nontradables accounts for up to 70 percent of real exchangerate variability during these periods. The paper also proposes a model in which this fact, and the sudden stops that accompanied the collapse of Mexico's managed exchange rates, could result from a Fisherian debt-deflation mechanism operating via nontradables prices in economies with dollarized liabilities.
Keywords: real exchange rate, managed exchange rates, sudden stops, liability dollarization
JEL Classification: F30, F41, G11
Suggested Citation: Suggested Citation
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Real Exchange Rate Volatility and the Price of Nontradables in Sudden-Stop-Prone Economies