Working Paper: NBER ID: w1342
Authors: Alan C. Stockman; Harris Dellas
Abstract: This paper demonstrates that disturbances to supplies or demands for internationally traded goods affect exchange-rates differently than do disturbances in markets for nontraded goods. The paper develops a stochastic two-country equilibrium model of exchange rates, asset prices, and goods prices, with two internationally traded goods and a nontraded good in each country. Optimal portfolios differ across countries because of differences in consumption bundles. Changes in exchange-rates, asset prices, and goods prices occur in response to underlying disturbances to supplies and demands for goods. We examine the ways in which responses of the exchange-rate are related to parameters of tastes and production shares, and we discuss conditions under which these exchange-rate responses are "large" compared to the responses of ratios of nominal price indexes.
Keywords: exchange rates; terms of trade; nontraded goods; stochastic model
JEL Codes: F31; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| disturbances in supply of internationally traded goods (F69) | changes in exchange rates (F31) |
| increase in the output of a traded good (F16) | changes in exchange rates (F31) |
| changes in exchange rates (F31) | changes in nominal goods prices (E39) |
| elasticities of demand and production shares (E23) | variability of exchange rates compared to price ratios (F31) |