Working Paper: NBER ID: w24655
Authors: Andres Blanco; Javier Cravino
Abstract: We measure the proportion of real exchange rate movements accounted for by cross-country movements in relative reset prices (prices that changed since the previous period) using CPI microdata for five countries. Relative reset prices account for almost the totality of the real exchange rate movements. This is at odds with the predictions of most workhorse sticky price models used to generate volatile and persistent real exchange rates. In these models relative reset prices are sluggish because relative wages are either sluggish or mean revert quickly. We show that models where movements in relative wages are persistent and track the nominal exchange rate do replicate the empirical properties of both the real exchange rate and of relative reset prices.
Keywords: real exchange rates; relative reset prices; price rigidities; sticky price models
JEL Codes: F31; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| relative reset prices (P22) | real exchange rate movements (F31) |
| persistent relative wages (J31) | failure of traditional sticky price models (C54) |
| persistent relative wages (J31) | empirical properties of real exchange rates and relative reset prices (F31) |
| changes in reset exchange rate (F31) | changes in real exchange rate (F31) |