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Sergio Rebelo - One of the best experts on this subject based on the ideXlab platform.
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distribution costs and real Exchange Rate dynamics during Exchange Rate based stabilizations
Journal of Monetary Economics, 2003Co-Authors: Ariel Burstein, Joao Cesar Das Neves, Sergio RebeloAbstract:This paper studies the role played by distribution costs in shaping the behavior of the real Exchange Rate during Exchange-Rate-based stabilizations . We document that distribution costs are very large for the average consumer good: they represent more than 40 percent of the retail price in the US and roughly 60 percent of the retail price in Argentina. Distribution services require local labor and land so they drive a natural wedge between retail prices in different countries. We show that introducing a distribution sector in an otherwise standard model of Exchange -Rate-based stabilizations dramatically improves its ability to rationalize observed real Exchange Rate dynamics.
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distribution costs and real Exchange Rate dynamics during Exchange Rate based stabilizations
2000Co-Authors: Ariel Burstein, Joao Cesar Das Neves, Sergio RebeloAbstract:This Paper studies the role played by distribution costs in shaping the behaviour of the real Exchange Rate during Exchange-Rate-based stabilizations. We document that distribution costs are very large for the average consumer good: the represent more than 40% of the retail price in the US and 60% of the retail price in Argentina. Distribution services require local labour and so they drive a natural wedge between retail prices in different countries. We show that introducing a distribution sector in an otherwise standard model of Exchange-Rate-based stabilizations dramatically improves its ability to rationalise observed real Exchange Rate dynamics.
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distribution costs and real Exchange Rate dynamics during Exchange Rate based stabilizations
National Bureau of Economic Research, 2000Co-Authors: Ariel Burstein, Joao Cesar Das Neves, Sergio RebeloAbstract:This paper studies the role played by the distribution sector in shaping the behavior of the real Exchange Rate during Exchange-Rate-based stabilizations. We use data for the U.S. and Argentina to document the importance of distribution margins in retail prices and disaggregated price data to study price dynamics in the aftermath of Argentina's 1991 Convertibility plan. Distribution services require local labor and land so they drive a natural wedge between retail prices in different countries. We study in detail the impact of introducing a distribution sector in an otherwise standard model of Exchange-Rate-based stabilizations. We show that this simple extension improves dramatically the ability of the model to rationalize observed real Exchange Rate dynamics.
Charles M Engel - One of the best experts on this subject based on the ideXlab platform.
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Exchange Rate puzzles: evidence from rigidly fixed nominal Exchange Rate systems
2019Co-Authors: Charles M Engel, Feng ZhuAbstract:We examine several major Exchange Rate puzzles: the excess volatility of real Exchange Rates; their excess reaction to the real interest Rate differentials; the uncovered interest Rate parity (UIP) puzzle; the excess persistence of real Exchange Rates; the Exchange Rate disconnect puzzle; and the consumption correlation puzzle. We examine the behaviour of real Exchange Rates among pairs of economies that have rigidly fixed nominal Exchange Rates, eg countries within the euro area, regions in China and Canada, and Hong Kong SAR vis-a-vis the United States, compared with that among non-euro-area OECD economies. Our results suggest that some of these puzzles are less puzzling under a rigidly fixed Exchange Rate regime. In particular, real Exchange Rates appear to have no or little excess volatility; excess reaction of the real Exchange Rate to real interest Rates is less common; there is less disconnect between the real Exchange Rate and the economic fundamentals; and uncovered interest Rate parity appears to hold more frequently in these economies. However, real Exchange Rates are as persistent in these economies as in the floating Rate economies and there appears to be little difference in risk-sharing across countries with fixed versus floating nominal Exchange Rates. These results may have implications for Exchange Rate modelling.
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expenditure switching vs real Exchange Rate stabilization competing objectives for Exchange Rate policy
Journal of Monetary Economics, 2007Co-Authors: Michael B Devereux, Charles M EngelAbstract:This paper develops a view of Exchange Rate policy as a trade-off between the desire to smooth fluctuations in real Exchange Rates so as to reduce distortions in consumption allocations, and the need to allow flexibility in the nominal Exchange Rate so as to facilitate terms of trade adjustment. We show that optimal nominal Exchange Rate volatility will reflect these competing objectives. The key determinants of how much the Exchange Rate should respond to shocks will depend on the extent and source of price stickiness, the elasticity of substitution between home and foreign goods, and the amount of home bias in production. Quantitatively, we find the optimal Exchange Rate volatility should be significantly less than would be inferred based solely on terms of trade considerations. Moreover, we find that the relationship between price stickiness and optimal Exchange Rate volatility may be non-monotonic.
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Exchange-Rate Models
2006Co-Authors: Charles M EngelAbstract:Recent research that my co-authors and I have undertaken, as well as related research by other NBER researchers, suggests that theoretical models of foreign Exchange Rates are "not as bad as you think." Since the 1970s, models have emphasized the role of Exchange Rates as asset prices. The new work, looking at present-value models of Exchange Rates, highlights the role of expectations in determining Exchange Rate movements. In this article, I briefly summarize some of the work that I have been involved with, along with a few related papers by other researchers. I also report on some research that has drawn the implications of this new work on Exchange Rates for open-economy macroeconomic policy. Should Exchange Rate Models Out-predict the Random Walk Model? For many years, the standard criterion for judging Exchange Rate models has been, do they beat the random-walk model for forecasting changes in Exchange Rates? This criterion was popularized by the seminal work of Meese and Rogoff. (1) They found that the empirical Exchange Rate models of the 1970s that seemed to fit very well in-sample tended to have a very poor out-of-sample fit. The mean-squared error of the model's prediction of the Exchange Rate (using realized values of the explanatory variables) tended to be lower than the mean-squared error of the naive model that predicts no change in the Exchange Rate. While Meese and Rogoff's exercise was not strictly speaking "forecasting" (because it used realized explanatory variables to "predict" the Exchange Rate), subsequent work has evaluated Exchange Rate models by the criterion of whether they produce forecasts with a lower mean-squared error than the simple random walk forecast of no change. Mark's (1995) paper was important in reviving interest in empirical Exchange Rate models. (2) He found that the models were helpful in predicting Exchange Rates at long horizons. Subsequent work has cast doubt on whether Exchange Rates can be forecast at long horizons, so there is a weak consensus that the models are not very helpful in forecasting. (It is worth noting that there is a contingent that believes that non-linear models have forecasting power. When Exchange Rates are far out of line with the fundamentals, the models are useful in predicting that the Exchange Rate will return to its fundamental level.) West and I (3) question the standard criterion for judging Exchange Rate models. Many Exchange Rate models can be written so that they explain the Exchange Rate as a weighted sum of current "fundamentals" (such as money supplies, prices, output levels) and the expected future value of the Exchange Rate. The models actually put relatively little weight on the current fundamentals and much more weight on expectations. The realization of the current fundamental may affect the Exchange Rate indirectly by influencing the expected future Exchange Rate. But markets use many sources of information to form expectations of the future Exchange Rate, not just the realizations of the current fundamentals. So, the models imply that innovations in the current fundamental may not have a large effect on the Exchange Rate. This type of model can be solved forward to express the Exchange Rate as the expected present discounted value of current and future fundamentals. West and I demonstRate the following result for this class of models: if the fundamentals are integRated of order 1 (that is, their first difference is stationary), and the discount factor is close to one, then the Exchange Rate will approximately follow a random walk. One important implication of this result is that the standard criterion used in evaluating Exchange Rate models--can the models out-forecast a random walk?--is not useful here. The Engel-West result shows that the models actually imply that the Exchange Rate will approximately follow a random walk. Evidence that they do not perform better than a random walk in forecasting Exchange Rates cannot be taken as evidence against the models. …
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Exchange Rate Pass-Through, Exchange Rate Volatility, and Exchange Rate Disconnect
2002Co-Authors: Michael B Devereux, Charles M EngelAbstract:This paper explores the hypothesis that high volatility of real and nominal Exchange Rates may be due to the fact that local currency pricing eliminates the pass-through from changes in Exchange Rates to consumer prices. Exchange Rates may be highly volatile because in a sense they have little effect on macroeconomic variables. The paper shows the ingredients necessary to construct such an explanation for Exchange Rate volatility. In addition to the presence of local currency pricing, we need a) incomplete international financial markets, b) a structure of international pricing and product distribution such that wealth effects of Exchange Rate changes are minimized, and c) stochastic deviations from uncovered interest Rate parity. Together, it is shown that these elements can produce Exchange Rate volatility that is much higher than shocks to economic fundamentals, and `disconnected' from the rest of the economy in the sense that the volatility of all other macroeconomic aggregates are of the same order as that of fundamentals.
Janice Boucher Breuer - One of the best experts on this subject based on the ideXlab platform.
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Nominal Exchange Rate volatility, relative price volatility, and the real Exchange Rate
Journal of International Money and Finance, 2010Co-Authors: Srideep Ganguly, Janice Boucher BreuerAbstract:We model real Exchange Rate, nominal Exchange Rate, and relative price volatility using real and nominal factors. We analyze these volatility measures across developing and industrialized countries. We find that the inclusion of nominal factors achieves a sizable reduction in the real Exchange Rate volatility spread between developing and industrialized countries. In addition, we find that nominal factors matter to real Exchange Rate volatility in the short run and the long run, and that for developing countries, a higher share of real Exchange Rate volatility stems from relative price volatility.
Kanda Naknoi - One of the best experts on this subject based on the ideXlab platform.
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Real Exchange Rate fluctuations, endogenous tradability and Exchange Rate regimes
Journal of Monetary Economics, 2008Co-Authors: Kanda NaknoiAbstract:The real Exchange Rate is driven by fluctuations of the relative price of traded goods and the relative price of nontraded to traded goods. This study explains the variance decomposition of the real Exchange Rate using a stochastic dynamic general equilibrium model of comparative advantage with money. Given interest Rate shocks, Exchange Rate stability reduces the covariance between the two relative prices and raises the contribution of the relative price of nontraded to traded goods. Productivity shocks do not alter the covariance across Exchange Rate regimes and let the relative price of traded goods drive the real Exchange Rate.
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Real Exchange Rate fluctuations, endogenous tradability and Exchange Rate regime
International Finance, 2005Co-Authors: Kanda NaknoiAbstract:This paper, empirically and theoretically, studies variance decomposition of real Exchange Rate. We find that deviations from the law of one price for traded goods drive most real Exchange Rates. However, the relative price of nontraded goods is also important for some countries maintaining stable Exchange Rate. We propose an explanation based on dynamics of comparative advantage. Our model predicts that comovement of terms of trade and productivity differentials of the nontraded and the export sector raises importance of deviations from the law of one price. With interest Rate shocks, Exchange Rate stability reduces the covariance and raises importance of the relative price of nontraded goods. Productivity shocks geneRate positive covariance and make deviations from the law of price play a dominant role, regardless of Exchange Rate flexibility.
John Williamson - One of the best experts on this subject based on the ideXlab platform.
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Exchange Rate economics
Open Economies Review, 2009Co-Authors: John WilliamsonAbstract:Much of the paper is devoted to expounding the standard model of the Exchange Rate accepted by most economists today. This regards the Exchange Rate as a forward-looking asset price. Its steady-state level is determined by the need to have a current account balance that will keep the debt/gross domestic product (GDP) ratio constant, while the path of adjustment toward this steady-state level is determined by the representative agent's rational expectation of what will happen between now and the long run. The paper then examines a number of criticisms of this model: that Exchange Rate changes are driven by 'news' and will be nonexistent in the absence of news; that it implies that chartist rules will systematically lose money; and that it leaves no room for 'bubble-and-crash' dynamics, which appear to have occurred. An alternative 'behavioral' model that gives room for such behavior is presented. The paper then argues that overvaluation can thwart development through an attack of 'Dutch disease,' and discusses the role that Exchange Rate policy may play in avoiding this outcome. This demands primarily the use of nonmonetary instruments like fiscal policy or capital controls, but the behavioral model of the Exchange Rate implies that intervention can also play a role. The paper also includes a discussion of the alternative Exchange-Rate regimes available.
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Exchange Rate Management
The Economic Journal, 1993Co-Authors: John WilliamsonAbstract:In the same week that the pound sterling and the Italian lira were forced by speculative pressures to suspend their participation in the Exchange Rate Mechanism (ERM) of the European Monetary System (EMS), a study was published which concluded that Exchange market intervention was a far more potent instrument for managing Exchange Rates than the conventional wisdom had held (Catte, Galli and Rebecchini, I 992 a). I shall argue in this paper that, far from providing instant refutation of the new optimism regarding the potency of intervention, what we currently understand about Exchange Rate theory is consistent with both the tumult in the Exchange markets in September I992 and the new optimism. The paper seeks to draw the implications of current knowledge for what Exchange Rate management can and cannot hope to accomplish. The first section of the paper reviews where Exchange Rate theory stands. A second section discusses what we know about the possibility of managing Exchange Rates and how that ties in with the theory. The final section explores how Exchange Rate management needs to vary, depending on whether it is intended to use the Exchange Rate as a nominal anchor or to limit misalignments in a more Keynesian approach to policy design.
