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Trade Costs and Real Exchange Rate Volatility The Role of Ricardian Comparative Advantage

This paper examines the impact of trade costs on real exchange rate volatility. We incorporate a multi-country Ricardian model of trade, based on the work of Eaton and Kortum (2002), into a macroeconomic model to show how bilateral real exchange rate volatility depends on relative technological diff...

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Bibliographic Details
Corporate Author: International Monetary Fund
Format: eBook
Language:English
Published: Washington, D.C. International Monetary Fund 2005
Series:IMF Working Papers
Subjects:
Price Level
International Finance: General
Trade Policy
Exports And Imports
International Trade
Foreign Exchange
Real Exchange Rates
Currency
Deflation
Inflation
International Economics
Exchange Rates
Macroeconomic Aspects Of International Trade And Finance: General
Macroeconomics
Price Indexes
Plurilateral Trade
Exchange Rate Arrangements
International Trade Organizations
Online Access:
Collection: International Monetary Fund - Collection details see MPG.ReNa
Description
Summary:This paper examines the impact of trade costs on real exchange rate volatility. We incorporate a multi-country Ricardian model of trade, based on the work of Eaton and Kortum (2002), into a macroeconomic model to show how bilateral real exchange rate volatility depends on relative technological differences and trade costs. These differences highlight a new channel, in which the similarity of a pair of countries' set of suppliers of traded goods affects bilateral exchange rate volatility. We then test the importance of this channel using a large panel of cross-country data over 1970-97, and find strong evidence supporting the channel
Physical Description:43 pages
ISBN:9781451860245

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