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Research on Exchange Rates and International Prices Costas Arkolakis - - PowerPoint PPT Presentation
Research on Exchange Rates and International Prices Costas Arkolakis - - PowerPoint PPT Presentation
Research on Exchange Rates and International Prices Costas Arkolakis Teaching fellow: Federico Esposito Economics 407, Yale January 2014 Engel 1999: Accounting for US RER changes Measure the proportion of US RER movements accounted by
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Price Index: A Parametrized Version
We follow the approach of Engel 1999 Let PT
t : Price index of tradables, PN t : price index of nontradables.
Assume Cobb-Douglas price-indexes:
Pt =
- PT
t
1α PN
t
α
and P
t =
- PT
t
1β PN
t
β
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Price Index: A Parametrized Version
Let PT
t : Price index of tradables, PN t : price index of nontradables.
Assume Cobb-Douglas price-indexes:
Pt =
- PT
t
1α PN
t
α
and P
t =
- PT
t
1β PN
t
β
Let pt = log Pt, pT
t = log PT t , pN t = log PN t . The price indexes become
pt = (1 α) pT
t + αpN t
and p
t = (1 β) pT t
+ βpN
t
SLIDE 5
Price Index: A Parametrized Version
Let PT
t : Price index of tradables, PN t : price index of nontradables.
Assume Cobb-Douglas price-indexes:
Pt =
- PT
t
1α PN
t
α
and P
t =
- PT
t
1β PN
t
β
Let pt = log Pt, pT
t = log PT t , pN t = log PN t . The price indexes become
pt = (1 α) pT
t + αpN t
and p
t = (1 β) pT t
+ βpN
t
Let ˜
et = log et, ˜ Et = log Et. The real exchange rate has as ˜ et = ˜ Et + p
t pt
˜ et = ˜ Et + pT
t
pT
t + β
- pN
t
pT
t
- α
- pN
t pT t
- |
{z }
non-traded goods component
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Goal
How much of the exchange rate movements can be explained by the nontraded goods component ˜ et = ˜ Et + pT
t
pT
t + β
- pN
t
pT
t
- α
- pN
t pT t
- |
{z }
non-traded goods component
Look at …ve measures of nontraded-goods prices
CPI for tradables and nontradables OECD output prices for traded- and nontraded-goods Personal consumption de‡ators Producer Price Index (PPI) vs Consumer Price Index (CPI)
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Goal
How much of the exchange rate movements can be explained by the nontraded goods component ˜ et = ˜ Et + pT
t
pT
t + β
- pN
t
pT
t
- α
- pN
t pT t
- |
{z }
non-traded goods component
Contribution vs previous literature:
Uses data for tradables, nontradables in order to compare the contribution of nontraded to traded goods Conclusion: nontraded-goods account for very little of movement in real exchange rates. Movements mostly explained by violations of the law of one price for tradeables. Engel’s results are largerly con…rmed & extended to a sample of 50 countries by Betts and Kehoe 2006
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Betts and Kehoe 2006
Figure: Contribution of Real Exchange Rate of Non-Tradeable to overall Real Excange Rate
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Betts and Kehoe 2006
Figure: Contribution of Real Exchange Rate of Non-Tradeable to overall Real Excange Rate, various trade-weighted statistics
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