Journal Article

Currency Unions, Product Introductions, and the Real Exchange Rate

Alberto Cavallo, Brent Neiman and Roberto Rigobon

in The Quarterly Journal of Economics

Published on behalf of President and Fellows of Harvard University

Volume 129, issue 2, pages 529-595
Published in print May 2014 | ISSN: 0033-5533
Published online March 2014 | e-ISSN: 1531-4650 | DOI: https://dx.doi.org/10.1093/qje/qju008
Currency Unions, Product Introductions, and the Real Exchange Rate

More Like This

Show all results sharing these subjects:

  • Prices, Business Fluctuations, and Cycles
  • Macroeconomic Aspects of International Trade and Finance
  • International Finance

GO

Show Summary Details

Preview

We use a novel data set of online prices of identical goods sold by four large global retailers in dozens of countries to study good-level real exchange rates and their aggregated behavior. First, in contrast to the prior literature, we demonstrate that the law of one price holds very well within currency unions for tens of thousands of goods sold by each of the retailers, implying good-level real exchange rates often equal to 1. Prices of these same goods exhibit large deviations from the law of one price outside of currency unions, even when the nominal exchange rate is pegged. This clarifies that the common currency per se, and not simply the lack of nominal volatility, is important in reducing cross-country price dispersion. Second, we derive a new decomposition that shows that good-level real exchange rates in our data predominantly reflect differences in prices at the time products are first introduced, as opposed to the component emerging from heterogeneous passthrough or from nominal rigidities during the life of the good. Further, these international relative prices measured at the time of introduction move together with the nominal exchange rate. This stands in sharp contrast to pricing behavior in models where all price rigidity for any given good is due simply to costly price adjustment for that good.

Keywords: E30; F30; F41

Journal Article.  17466 words.  Illustrated.

Subjects: Prices, Business Fluctuations, and Cycles ; Macroeconomic Aspects of International Trade and Finance ; International Finance

Full text: subscription required

How to subscribe Recommend to my Librarian

Users without a subscription are not able to see the full content. Please, subscribe or login to access all content. subscribe or login to access all content.