Measuring U.S. international relative prices
Subtitle: a WARP view of the world
By: Charles P. Thomas, Jaime Marquez, and Sean Fahle.
Contributors: Marquez, Jaime R.; Fahle, Sean.; Board of Governors of the Federal Reserve System (U.S.)
Series: International finance discussion papers -- no. 917; International finance discussion papers (Online) -- no. 917.
Publisher: Federal Reserve Board
Published: 2008
Place of publication: Washington, D.C
Language: eng
Format: Electronic resource
Description: "In this paper we construct a new measure of U.S.  prices relative to those of its trading partners and use it to reexamine the behavior of U.S.  net exports.  Our measure differs from existing measures of the dollar's real effective exchange rate (REER) in that it explicitly incorporates both the difference in price levels between the United States and developing economies and the growing importance of these developing economies in world trade.  Unlike existing REERs, our measure shows that relative U.S.  prices have increased significantly over the past 15 years.  In terms of simple correlations, the relationship between our measure of relative prices and U.S.  net exports is much more coherent than that between existing REERs and net exports.  To explore this relationship further, we use our measure to construct an index of foreign prices relevant for U.S.  export volumes and reexamine several export equations.  We find that export equations with the new index dominate those with previous measures in terms of in-sample fit, out-of-sample fit, and parameter constancy.  In addition, we find that with the new index of foreign prices the estimated elasticity of U.S.  exports with respect to foreign income is a good bit higher than the unitary elasticity found in previous studies using other price measures.  This has implications for U.S.  current account adjustment"--Federal Reserve Board web site.
Notes: Title from PDF file as viewed on 1/31/2008.

Includes bibliographical references.

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