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Accounting for persistence and volatility of good-level real exchange rates: The role of sticky information
Authors:Mario J. Crucini  Mototsugu Shintani
Affiliation:a Department of Economics, Vanderbilt University, Nashville, TN 37235-1819, USA
b NBER, USA
c Faculty of Economics, Kansai University, Suita, Osaka 564-8680, Japan
Abstract:Volatile and persistent real exchange rates are observed not only in aggregate series but also in micro-price data at the retail level. 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 (LOP) deviations. We extend their sticky price model by combining good-specific price adjustment with information stickiness in the sense of Mankiw and Reis (2002). 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 165 individual goods. Under a reasonable assumption on the money growth process, we show that the model matches the persistence of the LOP deviation for the median good and accounts for the majority of its volatility when information updates occur every 12 months.
Keywords:E31   F31   D40
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