Working Paper: NBER ID: w17812
Authors: Mario J. Crucini; Anthony Landry
Abstract: The classical dichotomy predicts that all of the time series variance in the aggregate real exchange rate is accounted for by non-traded goods in the CPI basket because traded goods obey the Law of One Price. In stark contrast, Engel (1999) found that traded goods had comparable volatility to the aggregate real exchange rate. Our work reconciles these two views by successfully applying the classical dichotomy at the level of intermediate inputs into the production of final goods using highly disaggregated retail price data. Since the typical good found in the CPI basket is about equal parts traded and non-traded inputs, we conclude that the classical dichotomy applied to intermediate inputs restores its conceptual value.
Keywords: No keywords provided
JEL Codes: F0; F2; F3; F4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| nontraded goods (F19) | real exchange rate variability (F31) |
| traded goods (F19) | real exchange rate variability (F31) |
| classical dichotomy applied to intermediate inputs (D57) | contributions of traded and nontraded goods to real exchange rate variability (F31) |
| law of one price deviations (F16) | contributions of traded goods to real exchange rate variability (F31) |