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

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

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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.Mr. Enrique G. Mendoza. Next we adopt a set of assumptions that imply that, when the credit frictions never bind, the equilibrium reduces to a textbook ... economy satisfies the traditional stationarity condition , 6R:1 and that the nontradables output is time invariant (yjv = 37a€ for all t). ... Define then a a€œwealth neutrala€ shock to date-0 tradables income as a change in the date-0 endowment offset by a changeanbsp;...


Title:Real Exchange Rate Volatility and the Price of Nontradables in Sudden-Stop-Prone Economies
Author:Mr. Enrique G. Mendoza
Publisher:International Monetary Fund - 2006-03-01
ISBN-13:

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