Working Paper: NBER ID: w14437
Authors: Caroline M. Betts; Timothy J. Kehoe
Abstract: We study the quarterly bilateral real exchange rate and the relative price of non-traded to traded goods for 1225 country pairs over 1980-2005. We show that the two variables are positively correlated, but that movements in the relative price measure are smaller than those in the real exchange rate. The relation between the two variables is stronger when there is an intense trade relationship between two countries and when the variance of the real exchange rate between them is small. The relation does not change for rich/poor country bilateral pairs or for high inflation/low inflation country pairs. We identify an anomaly: The relation between the real exchange rate and relative price of non-traded goods for US/EU bilateral trade partners is unusually weak.
Keywords: Real Exchange Rate; Nontraded Goods; International Trade
JEL Codes: F31; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| bilateral real exchange rate (rert) (F31) | relative price of nontraded goods (rertn) (F16) |
| relative price of nontraded goods (rertn) (F16) | bilateral real exchange rate (rert) (F31) |
| strong trade relationships (F10) | correlation between bilateral real exchange rate (rert) and relative price of nontraded goods (rertn) (F31) |
| low variability in real exchange rates (F31) | stronger relations between bilateral real exchange rate (rert) and relative price of nontraded goods (rertn) (F31) |