Working Paper: CEPR ID: DP4810
Authors: Ariel Thomas Burstein; Martin Eichenbaum; Sergio Rebelo
Abstract: In this Paper we argue that the primary force behind the large drop in real exchange rates that occurs after large devaluations is the slow adjustment in the price of non-tradable goods and services. Our empirical analysis uses data from five large devaluation episodes: Argentina (2001), Brazil (1999), Korea (1997), Mexico (1994), and Thailand (1997). We conduct a detailed analysis of the Argentina case using disaggregated CPI data, data from our own survey of prices in Buenos Aires, and scanner data from supermarkets. We assess the robustness of our findings by studying large real-exchange-rate appreciations, medium devaluations, and small exchange-rate movements.
Keywords: devaluation; real exchange rate; nontradable goods; inflation; purchasing power parity
JEL Codes: F31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| slow adjustment of nontradable goods prices (F16) | lower inflation rates (E31) |
| lower inflation rates (E31) | decline in dollar prices of nontradable goods (E31) |
| slow adjustment of nontradable goods prices (F16) | behavior of real exchange rates (F31) |
| relative price change between nontradables and pure-traded goods (F16) | real exchange rate movements (F31) |
| large devaluations (F31) | violation of relative purchasing power parity (PPP) is misleading (F31) |
| large devaluations (F31) | lower inflation rates (E31) |
| large devaluations (F31) | drop in real exchange rates (F31) |