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Federal Reserve Bank of Dallas
Globalization Institute Working Papers
Accounting for persistence and volatility of good-level real exchange rates: the role of sticky information
Volatile and persistent real exchange rates are observed not only in aggregate series but also on the individual good level data. Kehoe and Midrigan (2007) recently showed that, under a standard assumption on nominal price stickiness, empirical frequencies of micro price adjustment cannot replicate the time-series properties of the law-of-one-price deviations. We extend their sticky price model by combining good specific price adjustment with information stickiness in the sense of Mankiw and Reis (2002). Under a reasonable assumption on the money growth process, we show that the model fully explains both persistence and volatility of the good-level real exchange rates. Furthermore, our framework allows for multiple cities within a country. Using a panel of U.S.-Canadian city pairs, we estimate a dynamic price adjustment process for each 165 individual goods. The empirical result suggests that the dispersion of average time of information update across goods is comparable to that of average time of price adjustment.
Cite this item
Mario J. Crucini & Mototsugu Shintani & Takayuki Tsuruga, Accounting for persistence and volatility of good-level real exchange rates: the role of sticky information, Federal Reserve Bank of Dallas, Globalization Institute Working Papers 07, 2008.
Note: Published as: Crucini, Mario E., Motosugu Shintani and Takayuki Tsuruga (2010), "Accounting for Persistence and Volatility of Good-Level Real Exchange Rates: The Role of Sticky Information," Journal of International Economics 81 (1): 48-60.
- D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- F31 - International Economics - - International Finance - - - Foreign Exchange
This item with handle RePEc:fip:feddgw:07
is also listed on EconPapers
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