Real exchange rate volatility and the price of nontradable goods in economies prone to sudden stops

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dc.description.abstract The dominant view in the empirical literature on exchange rates is that the high variability of real exchange rates is due to movements in exchange-rate-adjusted prices of tradable goods. This paper shows that this dominant view does not hold in Mexican data for the periods in which the country had managed exchange rate regimes. Variance analysis of a 30-year sample of monthly data shows that movements in the price of nontradables relative to tradables account for up to 70 percent of the variability of the real exchange rate during these periods. The paper proposes a model in which this stylized fact, and the Sudden Stops that accompanied the collapse of Mexico's managed exchange rates, could result from an endogenous amplification mechanism operating via nontradables prices in economies with dollarized liabilities and credit constraints. The key feature of this mechanism is Irving Fisher's debt-deflation process. Numerical evaluation suggests that the Fisherian deflation effects on consumption, the current account, and relative prices dwarf those induced by the standard balance sheet effect typical of the Sudden Stops literature. en
dc.title Real exchange rate volatility and the price of nontradable goods in economies prone to sudden stops en
dc.contributor.author Mendoza, Enrique G.
dc.date.accessioned 2014-11-17T01:50:49Z
dc.date.available 2014-11-17T01:50:49Z
dc.date.issued 2005-10
dc.identifier.issn 1529-7470
dc.identifier.uri http://hdl.handle.net/123456789/48740
lacea.language.supported en
dc.contributor.other Comments by Raphael Bergoeing and Nouriel Roubini
dc.language.iso en
dc.publisher Brookings Institution Press
dc.subject Exchange rate
dc.subject Volatility
dc.subject Financial economics
dc.subject Sudden stops
dc.subject Mexico
dc.type Article

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