Prices and Exchange Rates in Open Economies
Sunday, Jan. 7, 2018 10:15 AM - 12:15 PM
- Chair: Diego Perez, New York University
Exchange Rate Puzzles: Evidence From Rigidly Fixed Nominal Exchange Rate Systems
AbstractThe literature has identified several major “exchange rate puzzles” – involving the volatility and persistence of real exchange rates, the relationship between exchange rates and interest rates, aggregate consumption and productivity. We examine the behaviour of real exchange rates among pairs of economies that have rigidly fixed nominal exchange rates, such as countries within the euro area, regions in China and Canada, and Hong Kong vis-à-vis the United States. Preliminary evidence focusing on euro area economies, China, and a number of non-euro area OECD economies suggests that some of these puzzles are less “puzzling” under a rigidly fixed exchange rate regime. For instance, real exchange rates appear to have no or less “excess volatility” and less excess response to the real interest rate differential for fixed-rate country pairs. In addition, consumption correlation turns out to be more consistent with predictions from economic theory in the economies with a rigidly fixed exchange rate. On the other hand, real exchange rates also seem to have greater persistence. These results may have implications for exchange rate modelling.
Real Exchange Rate Behavior: New Evidence from Matched Retail Goods
AbstractWe use a dataset containing daily prices for thousands of matched retail products in nine countries to study tradable-goods real exchange rates. Prices were collected from the websites of large multi-channel retailers and then carefully matched into narrowly-defined product categories, providing relative price levels data that collectively represent the bulk of expenditures on food, fuel, and consumer electronics in each country. Using bilateral results with the US, we show that relative prices in local currencies co-move closely with nominal exchange rates. Exchange-rate passthrough into relative prices is approximately 75%, compared to 30% with CPI data for the same countries and time periods. We decompose the dierence and show that the majority of the dierence -about 25 percentage points- comes from the use of closely-matched products. The rest of the gap owes about equally to the exclusion of non-tradable sub-categories and to our inclusion of entering and exiting goods. These results suggest that the retail prices for tradable goods can adjust quickly to nominal exchange rate movements and vice-versa, and have important implications for a vast literature that tries to characterize both the level and behavior of real exchange rates over time.
Pricing in Multiple Currencies in Domestic Markets
AbstractWe document that in emerging economies a significant fraction of prices in domestic markets are set in dollars. The currency of prices is not homogeneous across goods. More expensive goods are more likely to be set in dollars and also take longer time to sell. We rationalize these facts using a model of price setting in multiple currencies with search frictions. Pricing in dollars prevents erosion of real prices caused by inflation at the expense of a lower willingness to pay from buyers. When goods take longer to sell the relative value of preventing price erosion is higher. Consistent with empirical evidence, our model predicts that the share of prices in foreign currency increases when domestic inflation is high.
- E3 - Prices, Business Fluctuations, and Cycles
- F4 - Macroeconomic Aspects of International Trade and Finance