Real Exchange Rate Volatility and the Price of Nontradables in Sudden-Stop-Prone Economies

34 Pages Posted: 17 May 2006

See all articles by Enrique G. Mendoza

Enrique G. Mendoza

National Bureau of Economic Research (NBER); University of Pennsylvania

Multiple version iconThere are 2 versions of this paper

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

Mendoza, Enrique G., Real Exchange Rate Volatility and the Price of Nontradables in Sudden-Stop-Prone Economies (March 2006). IMF Working Paper No. 06/88, Available at SSRN: https://ssrn.com/abstract=901879

Enrique G. Mendoza (Contact Author)

National Bureau of Economic Research (NBER) ( email )

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Cambridge, MA 02138
United States

University of Pennsylvania ( email )

Philadelphia, PA 19104
United States

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