Do sticky prices increase real exchange rate volatility at the sector level?
By: Mario J. Crucini, Mototsugu Shintani, Takayuki Tsuruga
Contributors: Shintani, Mototsugu; Tsuruga, Takayuki; National Bureau of Economic Research
Series: NBER working paper series -- working paper 16081; Working paper series (National Bureau of Economic Research : Online) -- working paper no. 16081.
Publisher: National Bureau of Economic Research
Published: 2010
Place of publication: Cambridge, MA
Language: eng
Format: Electronic resource
Description: "We introduce the real exchange rate volatility curve as a useful device to understand the role of price stickiness in accounting for deviations from the Law of One Price at the sector level.  In the presence of both nominal and real shocks, the theory predicts that the real exchange rate volatility curve is a U-shaped function of the degree of price stickiness.  Using sector-level European real exchange rate data and frequency of price changes, we estimate the volatility curve.  The results are consistent with the predominance of real effects over nominal effects.  Nonparametric analysis suggests the curve is convex and negatively sloped over the majority of its range.  Good-by-good variance decompositions show that the relative contribution of nominal shocks is smaller at the sector level than what previous studies have found at the aggregate level.  We conjecture that this is due to significant averaging out of good-specific real microeconomic shocks in the process of aggregation"--National Bureau of Economic Research web site.
Notes: Title from PDF file as viewed on 6/24/2010.

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