Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/209919 
Year of Publication: 
2009
Series/Report no.: 
Working Paper No. 2009/03
Publisher: 
Norges Bank, Oslo
Abstract: 
In an influential paper Engel (1999. Accounting for U.S. Real Exchange Rate Changes, Journal of Political Economy 107, 507-538) argues that essentially all the fluctuations in the real exchange rate can be attributed to fluctuations in the relative price of traded goods, and that only a small part of the fluctuations can be attributed to changes in the relative price of non-tradables. We instead decompose the real exchange rate into three components: the relative price of traded goods at-the-dock, the difference in the relative price of non-traded to traded goods and the difference in the wedge between retail prices of traded goods and the prices of traded goods at-the-dock. Using data on US bilateral real exchange rates we find that the fluctuations in the relative wedge between retail prices and traded goods prices at-the-dock account for on average between 30 and 70 percent of the movements in the real exchange rate. These findings suggest that the relationship between traded goods prices at-the-dock and retail prices of traded goods is key to understanding real exchange rate fluctuations.
Subjects: 
real exchange rates
JEL: 
F31
F41
Persistent Identifier of the first edition: 
ISBN: 
978-82-7553-486-4
Creative Commons License: 
cc-by-nc-nd Logo
Document Type: 
Working Paper
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