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Microeconomic Sources of Real Exchange Rate Variability

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  • Mario J. Crucini
  • Christopher I. Telmer

Abstract

We provide three sets of variance decompositions on microeconomic international relative price data. The first shows that the overall distribution of absolute deviations from the Law of One Price (LOP) is dominated by cross-sectional variation in long-term averages, not by time-series variation around the long-term averages. The second shows that time-series variation in changes in LOP deviations is dominated by idiosyncratic, goods-specific variation, not by aggregate variation such as that arising from nominal exchange rates. The third shows that time-series and cross-sectional variance are connected across goods. Goods that exhibit high cross-sectional variance also exhibit high time-series variance. Moreover, when this connection is made conditional on the tradeability of a goods, a two-factor structure for the goods-specific cross-section is revealed. We argue that this factor structure, in addition to our other variance decompositions, is informative for the construction of models that can synthesize the micro and macroeconomic behavior of relative prices.

Suggested Citation

  • Mario J. Crucini & Christopher I. Telmer, 2012. "Microeconomic Sources of Real Exchange Rate Variability," NBER Working Papers 17978, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:17978
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    Cited by:

    1. Crucini, Mario J. & Landry, Anthony, 2019. "Accounting for real exchange rates using micro-data," Journal of International Money and Finance, Elsevier, vol. 91(C), pages 86-100.
    2. Chahrour, Ryan & Stevens, Luminita, 2020. "Price dispersion and the border effect," Journal of Monetary Economics, Elsevier, vol. 116(C), pages 135-146.
    3. Rumler, Fabio & Reiff, Adam, 2014. "Within- and cross-country price dispersion in the euro area," Working Paper Series 1742, European Central Bank.
    4. Dvir, Eyal & Strasser, Georg, 2018. "Does marketing widen borders? Cross-country price dispersion in the European car market," Journal of International Economics, Elsevier, vol. 112(C), pages 134-149.
    5. Oleg Itskhoki, 2021. "The Story of the Real Exchange Rate," Annual Review of Economics, Annual Reviews, vol. 13(1), pages 423-455, August.
    6. Marina Glushenkova & Marios Zachariadis, 2024. "How different are Monetary Unions to national economies according to prices?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 29(1), pages 684-702, January.
    7. Crucini, Mario J. & Shintani, Mototsugu & Tsuruga, Takayuki, 2013. "Do sticky prices increase real exchange rate volatility at the sector level?," European Economic Review, Elsevier, vol. 62(C), pages 58-72.
    8. Alvarez, Fernando & Dixit, Avinash, 2014. "A real options perspective on the future of the Euro," Journal of Monetary Economics, Elsevier, vol. 61(C), pages 78-109.
    9. Burstein, Ariel & Gopinath, Gita, 2014. "International Prices and Exchange Rates," Handbook of International Economics, in: Gopinath, G. & Helpman, . & Rogoff, K. (ed.), Handbook of International Economics, edition 1, volume 4, chapter 0, pages 391-451, Elsevier.
    10. Ryan Chahrour & Luminita Stevens, 2015. "Equilibrium Price Dispersion and the Border Effect," Staff Report 522, Federal Reserve Bank of Minneapolis.
    11. Robertson, Raymond & Kumar, Anil & Dutkowsky, Donald H., 2014. "Weak-form and strong-form purchasing power parity between the US and Mexico: A panel cointegration investigation," Journal of Macroeconomics, Elsevier, vol. 42(C), pages 241-262.

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    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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