Real Exchange Rate Volatility and the Price of Nontradables in Sudden-Stop-Prone Economies

Author/Editor:

Enrique G. Mendoza

Publication Date:

March 1, 2006

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

This paper shows that the dominant view that the high variability of real exchange rates is due to movements in exchange rate-adjusted prices of tradable goods does not hold for Mexican data for periods with a managed exchange rate. The relative price of nontradables accounts for up to 70 percent of real exchange rate variability during these periods. The paper also proposes a model in which this fact, and the sudden stops that accompanied the collapse of Mexico's managed exchange rates, could result from a Fisherian debt-deflation mechanism operating via nontradables prices in economies with dollarized liabilities.

Series:

Working Paper No. 2006/088

Subject:

Consumption Credit Exchange rate arrangements Managed exchange rates Real exchange rates

English

Publication Date:

March 1, 2006

ISBN/ISSN:

9781451863482/1018-5941

Stock No:

WPIEA2006088

Pages:

34

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