U.S. real exchange rate fluctuations and relative price fluctuations

Caroline M. Betts, Timothy J Kehoe

Research output: Contribution to journalArticle

43 Citations (Scopus)

Abstract

Traditional theory attributes fluctuations in real exchange rates to changes in the relative price of nontraded goods. This paper studies the relation between the United States' bilateral real exchange rate and the associated bilateral relative price of nontraded goods for five of its most important trade relationships. We find that this relation depends crucially on the choice of price series used to measure relative prices and on the choice of trade partner. The relation is stronger when we measure relative prices using producer prices rather than consumer prices. The relation is stronger the more important is the trade relationship between the United States and a trade partner. Even in cases where there is a strong relation between the real exchange rate and the relative price of nontraded goods, however, a large fraction of real exchange rate fluctuations is due to deviations from the law of one price for traded goods.

Original languageEnglish (US)
Pages (from-to)1297-1326
Number of pages30
JournalJournal of Monetary Economics
Volume53
Issue number7
DOIs
StatePublished - Oct 1 2006
Externally publishedYes

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Exchange rate fluctuations
Real exchange rate
Fluctuations
Relative prices
Bilateral
Consumer prices
Producer prices
Deviation
Law of one price

Keywords

  • Real exchange rates
  • Relative prices
  • Trade relations

Cite this

U.S. real exchange rate fluctuations and relative price fluctuations. / Betts, Caroline M.; Kehoe, Timothy J.

In: Journal of Monetary Economics, Vol. 53, No. 7, 01.10.2006, p. 1297-1326.

Research output: Contribution to journalArticle

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