Working Paper: NBER ID: w7862
Authors: Ariel T. Burstein; Joo C. Neves; Sergio Rebelo
Abstract: This paper studies the role played by the distribution sector in shaping the behavior of the real exchange rate during exchange-rate-based-stabilizations. We use data for the U.S. and Argentina to document the importance of distribution margins in retail prices and disaggregated price data to study price dynamics in the aftermath of Argentina's 1991 Convertibility plan. Distribution services require local labor and land so they drive a natural wedge between retail prices in different countries. We study in detail the impact of introducing a distribution sector in an otherwise standard model of exchange-rate-based-stabilizations. We show that this simple extension improves dramatically the ability of the model to rationalize observed real exchange rate dynamics.
Keywords: distribution costs; real exchange rate; exchange-rate-based stabilizations
JEL Codes: F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| introduction of a distribution sector (D39) | real exchange rate dynamics (F31) |
| distribution costs (D39) | retail prices (D49) |
| distribution costs (D39) | real exchange rate movements (F31) |
| distribution sector dynamics (L81) | behavior of the real exchange rate (F31) |
| failure of purchasing power parity (PPP) (F31) | price discrepancies of tradable goods across countries (F14) |