Real exchange rate fluctuations,wage stickiness and tradability

When we classify factors of production by their tradability, the relative wage of nontraded labour influences the real exchange rate through the relative cost of distribution services. We confirm this prediction using monthly data on the sector‐level US–Canada real exchange rate and the relative wage of service‐producing labour. The relative wage accounts for 40% of the variability of the real exchange rate at a one‐month horizon. Furthermore, when we use the effective nontraded labour content to classify goods into nontraded and traded ones, the variability of the price of the nontraded‐goods basket accounts for more than half of the variability of the real exchange rate.     

UNDERSTANDING REAL EXCHANGE RATE MOVEMENTS WITH TRADE IN INTERMEDIATE PRODUCTS

We suggest that it may be ‘too easy’ to attribute real exchange rate movements to deviations from the law of one price. We show that it is immaterial whether one uses seemingly traded goods, nontraded goods, or even a single, unimportant consumer good, say beer. The ease of attributing the variation to any such deviations is explained using a model with intermediate goods trade. In the model, the stage of production determines the traded/nontraded distinction. We find empirical substantiation for the model: law of one price deviations lose explanatory power and, defined appropriately in terms of intermediate goods, relative prices matter.     

Are there bubbles in Chinese RMB–dollar exchange rate? Evidence from generalized sup ADF tests

This article uses recently developed generalized sup ADF (GSADF) unit root tests into the analysis of nominal RMB–dollar exchange rates bubbles. Based on the results from the GSADF tests, we find strong evidence of explosive behaviour in the nominal exchange rate and investigate two bubbles there. The first bubble is during 2005–2006 which is determined neither by the relative prices of traded goods nor the relative price of nontraded goods. The second bubble busts in 2008 during subprime crisis period, and which is determined by the relative prices of traded goods but not the relative price of nontraded goods. There is no bubble before 2005 as the exchange rate is under fixed regime. As for this result, some expansionary monetary and fiscal policies are required in China since these are the most efficient and effective under a bubble burst scenario.     

Offshoring and Trade Balance in Developed and Emerging Economies

This paper analyzes the effects of off‐shore outsourcing for international trade, especially for the emerging and poor economies, in a two‐sector specific factor model, with a nontraded good being one of the sectors. The phenomenon of offshoring is modeled by incorporating the reduced use of domestic labor in the production function. This is regarded as a characteristic feature of offshoring in the literature. We find that increased offshoring leads to an increase in the relative price of the nontraded good. Given that this relative price can be interpreted as the real exchange rate, increased offshoring leads to exchange rate appreciation. This suggests that offshoring actually makes the goods and services from the emerging economies more competitive in the world market, and thus can be a contributory factor in the positive trade balance experienced by many emerging economies since early 2000s.     

What Determines Real Exchange Rates? The Nordic Countries

The model derived in this paper yields testable implications concerning the long‐run co‐movements of real exchange rates, relative labor productivity, the trade balance and terms of trade. Countries with relatively higher output growth, trade deficits or improved terms of trade are found to have more appreciated real exchange rates, with the main channel of transmission working through the relative price of nontraded goods. Exogenous terms‐of‐trade shocks are found to be the most important determinant of long‐run movements in the real exchange rate for Denmark and Norway, while demand shocks account for most of the long‐run variance in the real exchange rate for Finland and Sweden.     

TOURISM,DUTCH DISEASE AND WELFARE IN AN OPEN DYNAMIC ECONOMY*

This paper examines the effects of an expansion in tourism on capital accumulation, sectoral output and resident welfare in an open economy with an externality in the traded good sector. An expansion of tourism increases the relative price of the nontraded good, improves the tertiary terms of trade and hence yields a gain in revenue. However, this increase in the relative price of nontraded goods results in a lowering of the demand for capital used in the traded sector. The subsequent de‐industrialization in the traded good sector may lower resident welfare. This result is supported by numerical simulations.     

Nontraded Goods and Real Exchange Rates in a Multi‐Good Ricardian Model

The two‐country Ricardian trade model with discrete goods and uniform transport costs for tradable goods is applied to the decomposition of the real exchange rate into traded and nontraded components. The real exchange rate is driven almost entirely by changes in the productivity differentials in nontraded goods and also explains the Balassa–Samuelson effect of a lower cost of living in poor countries, but extraordinary transport costs for some nontraded goods are necessary to easily explain the Balassa–Samuelson effect.     

Optimal Monetary Policy and Sectoral Shocks: Is International Monetary Cooperation Beneficial?

A stochastic general‐equilibrium model is used to explore the welfare effects of optimal monetary policy and the potential benefits of policy coordination. Cross‐country perfectly symmetric shocks in the traded goods sectors and imperfectly correlated shocks in the non‐traded goods sectors are considered. In this set‐up, monetary policy may not be able to achieve efficient sectoral resource allocations within countries and avoid inefficient relative price changes across countries. Welfare gains from coordination are sizable if the shocks to the traded and non‐traded goods sectors are negatively correlated and both sectors are of roughly equal size.     

Traded and Nontraded Goods and Real Wages

The paper explains most, if not all, observations made by the empirical literature regarding the behavior of skilled and unskilled real wages in the United States, especially those since 1980. Generalizing the Stopler–Samuelson theorem, the authors show that the nontraded sector is critical to explaining the effects of changes in the price of traded goods on relative and absolute wages. Factor‐intensities play their role as in the traditional Stolper–Samuelson model, but the output of the nontraded sector matters as well. Specifically, freer trade benefits capital and hurts both the skilled and unskilled labor if the import as well as the nontraded sectors contract. This is a new result to the literature on Stolper–Samuelson issues.     

Home bias, distribution services and determinants of real exchange rates

This paper examines empirically how exogenous changes in the terms of trade affect the real exchange rate through the relative price of traded goods with Canada–US data. The relative price of traded goods is constructed using prices at the dock and retail prices. The first measure emphasizes the importance of home bias in consumption of traded goods. The second measure highlights the importance of distribution services required for consumption of traded goods. It is found that terms of trade shocks affect the relative price of traded goods using both measures. A possible interpretation of empirical findings is that home bias and distribution services are important for understanding the relative price of traded goods.     

Non-Traded Goods and Real Exchange Rate Fluctuations: A Structural VAR Analysis

Real exchange rate variance decompositions indicate that only a small fraction of real exchange rate movements can be attributed to changes in the relative price between traded and non-traded goods. This paper argues that those exercises, by ignoring the nature of the shocks behind real exchange rate changes, may be inadequate to measure the relative importance of non-traded goods prices. Instead, it proposes using a structural vector autoregression (SVAR) model to study the effects of shocks to the relative supply and relative demand for non-traded goods on the real exchange rate. The SVAR model is identified via long-run restrictions and is estimated for a group of advanced economies. The results indicate that for some countries, relative supply shocks can be a significant source of real exchange rate fluctuations.     

Reconsidering Real Interest Parity for Traded and Nontraded Goods

The goal of this paper is to examine the hypothesis of real interest rate parity by contrasting real interest rates across traded and nontraded goods under flexible exchange rates. We employ panel unit root tests to investigate the stationarity of real interest rate differentials. In particular, empirical results support the mean‐reverting property of real interest rate differentials for interest rates measured in terms of traded goods.     

Optimal exchange rate policy for a small oil-exporting country: A dynamic general equilibrium perspective

This paper examines the choice of optimal exchange rate regime for an oil-exporting small open economy using a welfare-based model. The paper extends the standard New Keynesian Small Open Economy model to include three countries: a small oil-exporting country and two large foreign countries. The model also features three sectors: traded, non-traded, and primary-commodity (crude-oil). The sources of uncertainty are random monetary (demand), productivity (real), and real oil price (supply) shocks. Despite the absence of a non-oil traded sector in this primary-commodity economy, the welfare analysis suggests that flexible exchange rate regimes can reduce external shocks and consumption volatility given certain caveats about pricing-schemes. The analysis also suggests that a basket peg is more welfare-improving than a unilateral peg, as higher volatility of the anchor currency reduces consumer welfare.     

Real Exchange Rate Trends and Growth: A Model of East Asia

In contrast to the Balassa–Samuelson hypothesis, many fast-growing Asian countries have experienced little trend real exchange rate appreciation, or even depreciation. Moreover, their long-run real exchange rate trend seems to be dominated by movements in traded goods prices. A model is developed which is consistent with these observations. As in the Balassa–Samuelson model, productivity growth is concentrated in the traded goods sector. Nevertheless the real exchange rate may exhibit trend depreciation, driven by persistent deviations in the price of traded goods from those in the reference country. The key feature of the model is the presence of endogenous productivity growth in the distribution services sector.     

Productivity,the Terms of Trade,and the Real Exchange Rate: Balassa–Samuelson Hypothesis Revisited

The paper examines how the Balassa–Samuelson hypothesis is affected by a modern variation of the standard model that allows product differentiation (within the traded and nontraded goods sectors) with the number of firms determined exogenously or endogenously. The hypothesis is found to be fragile in the modified framework. Small variations in the elasticity of substitution between home and foreign traded goods (within the range of estimates suggested in the literature), for example, can make the effect of a traded‐goods productivity improvement on the real exchange rate negative or positive, as well as small or large. This result provides a potential explanation of the mixed empirical results that have been obtained on the relationship between productivity and the real exchange rate.     

Half-lives of Deviations from PPP: Contrasting Traded and Nontraded Components of Consumption Baskets

The paper examines the convergence question by contrasting the half‐lives of deviations from purchasing power parity (PPP) across traded and nontraded goods in an exchange rate model with sticky prices. In particular, empirical results show that in most cases the half‐lives of PPP deviations for traded goods are shorter than those for total consumption and for nontraded goods.     

China's economic growth and its real exchange rate

The shocks that underlie China's comparatively rapid growth include gains in productivity, factor accumulation and policy reforms that increase allocative efficiency. The well-known Balassa–Samuelson hypothesis links productivity growth in tradable industries with real appreciations. Yet it relies heavily on the law of one price applying for tradable goods, against which there is now considerable evidence. In its absence, other growth shocks also affect the real exchange rate by influencing relative supply or demand for home product varieties. This paper investigates the pre-conditions for the Balassa–Samuelson hypothesis to predict a real appreciation in the Chinese case. It then quantifies the links between all growth shocks and the Chinese real exchange rate using a dynamic model of the global economy with open capital accounts and full demographic underpinnings to labor supply. The results suggest that financial capital inflows most affect the real exchange rate in the short term, while differential productivity is strong in the medium term. Contrary to expectation, in the long term demographic forces prove to be weak relative to changes in the skill composition of the labor force, which enhances services sector performance and depreciates the real exchange rate.     

International capital and nontraded goods in the long run

The present paper develops the comparative static properties of a small open economy which produces both traded goods and nontraded goods, and is a price taker in the international market for productive capital. Assumptions of full employment, competitive markets, and international mobility of productive cap ital input capture a long run horizon. Comparative static results associated with the wage, labor, and the price of the nontraded good are independent of factor intensity, factor substitution, and demand for the nontraded good. A tax on the traded good and a capital subsidy together raise national income and the real wage.     

Endogenous Growth in a Dependent Economy with Traded and Nontraded Capital

The equilibrium growth path for this economy depends upon the relative sectoral capital intensities of the two production functions. If the nontruded sector is relatively intensive in traded capital , both the relative price of nontraded output and the price of installed capital always remain at their respective steady-state levels. Traded capital and aggregate wealth are always on their respective steady-state growth paths. Nontraded capital undergoes transitional dynamics, ultimately converging to the growth rate of traded capital and an equilibrium ratio of traded to nontraded capital. If the sectoral intensities are reversed, both asset prices will follow transitional adjustment paths.     

The Dependent-Economy Model With Both Traded and Nontraded Capital Goods*

Dynamic versions of the dependent-economy model have been criticized for arbitrarily assuming that capital is either tradable or nontradable, and for choosing either the traded or nontraded sector to be capital intensive. Our model incorporates both types of capital and shows that the relative sectoral intensity of nontraded capital determines the dynamic adjustment of the relative price of nontradables. When the traded sector is intensive in nontraded capital, the saddlepath is flat. When the nontraded sector is intensive in nontraded capital, the saddlepath is negatively sloped. the relative sectoral intensity of traded capital primarily affects current-account dynamics.