Consumption And Real Exchange Rates With Incomplete Markets And Non Traded Goods

Author : Marco Aurelio Hernandez Vega
Publisher :
ISBN 13 : 9781124907215
Total Pages : pages
Book Rating : 4.9/5 (72 download)

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Download or read book Nontraded Goods Prices and Real Exchange Rate Volatility written by Marco Aurelio Hernandez Vega and published by . This book was released on 2011 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation provides new empirical evidence on the importance of nontraded goods in real exchange rate volatility as well as two essays that evaluate the performance of a new trade model á la Ghironi and Melitz [2005] in replicating such evidence. Chapter 2 provides new empirical evidence by looking at more highly disaggregated data than used in previous literature on consumer price index components and trade for the US and Mexico for the period 2002 to 2009. The main empirical results from this exercise suggest that the relative price of nontraded to traded goods (RERN) accounts for between 64% and 73% of the real exchange rate volatility which is significantly higher than that found in past studies (around 30%). The correlation between RERN and the real exchange rate is 71%. In contrast with previous literature lower frequency data increases the importance of RERN in the real exchange rate volatility: for quarterly data it is between 68% and 84% and for annual data the importance is between 78% and 88%. These results provide new evidence against the sticky price theory; while they generally support the Balassa-Samuelson theory, facts regarding the correlation of traded and nontraded goods prices point to the need to modify some features of this theory. Chapter 3 evaluates whether a "new trade" model, where entry of heterogeneous firms into international trade is endogenous, can explain the empirical facts documented in chapter 2 better than can a standard Balassa-Samuelson theory, where nontraded goods are exogenously determined. A symmetric two country dynamic stochastic general equilibrium model with heterogeneous firms and entry and exit from domestic and export markets, á la Ghironi and Melitz (2005), performs reasonably well in certain dimensions. Simulations show that the importance of the relative price of nontraded to traded goods (RERN) can explain between 80% and 89% of real exchange rate fluctuations, and can explain a correlation between RERN and the real exchange rate of 97%. The model fails to replicate the empirical evidence that the relative price of nontraded to traded goods is negatively correlated with the relative price of traded goods. Finally, in chapter 4 I calibrate the model to an asymmetric equilibrium where two different economies interact, one large economy representing the US and one small economy representing Mexico. The calibration will involve updating the value of some exogenous variables like the fixed export costs and re-calibrating the shape parameter k from the Pareto distribution. As a result of this new calibration the steady state of the model matches some of the US-Mexico relationships quite well. For example, the steady state of the model implies that home consumption is four times higher than foreign consumption. This value is close to the one reported by Bergin and Glick [2009]. Home real wage is 1.4 times that of foreign country. This value is significantly smaller than the values reported in other studies where wages in the US are up to eight times higher than in Mexico. Nevertheless, it can be considered a good feature of the model that home wages are higher. I conclude that the asymmetric calibration of the Ghironi and Melitz [2005] model improves its performance in replicating the stylized facts reported in chapter two, although, with some caveats regarding the signs and magnitudes of some of the correlations and the fact that moving from monthly to quarterly frequencies does not increases the importance of the relative price of nontraded to traded goods in explaining real exchange rate volatility.