Currency Unions, Product Introductions, and the Real Exchange Rate

Alberto  Cavallo; Brent  Neiman; Roberto  Rigobon

Article | Quarterly Journal of Economics

Currency Unions, Product Introductions, and the Real Exchange Rate

by Alberto Cavallo, Brent Neiman and Roberto Rigobon

Abstract

We use a novel dataset of online prices of identical goods sold by four large global retailers in dozens of countries to study good-level real exchange rates and their aggregated behavior. First, in contrast to the prior literature, we demonstrate that the law of one price holds very well within currency unions for tens of thousands of goods sold by each of the retailers, implying good-level real exchange rates often equal to one. Prices of these same goods exhibit large deviations from the law of one price outside of currency unions, even when the nominal exchange rate is pegged. This clarifies that the common currency per se, and not simply the lack of nominal volatility, is important in reducing cross-country price dispersion. Second, we derive a new decomposition that shows that good-level real exchange rates in our data predominantly reflect differences in prices at the time products are first introduced, as opposed to the component emerging from heterogeneous passthrough or from nominal rigidities during the life of the good. Further, these international relative prices measured at the time of introduction move together with the nominal exchange rate. This stands in sharp contrast to pricing behavior in models where all price rigidity for any given good is due simply to costly price adjustment for that good.

Keywords: currency union; Law of one price; international prices; global firm; Currency Exchange Rate; Price; International Finance;

Format: Print

Find at Harvard Read Now

Citation:

Cavallo, Alberto, Brent Neiman, and Roberto Rigobon. "Currency Unions, Product Introductions, and the Real Exchange Rate." Quarterly Journal of Economics 129, no. 2 (May 2014): 529–595.

Supplemental Information

Data

This dataset contains the raw micro data files for each retailer. These are daily posted prices for all goods sold by each of the retailers in all countries. The data was collected from 2008 to 2013. An file with exchange rates is also included.
Appendix

Case | HBS Case Collection | February 2019 (Revised March 2019)

The U.S. - China Trade War

Alberto Cavallo, Mariana Cal and Anne Laski

On December 1, 2018, U.S. President Donald Trump and China’s Leader Xi Jinping faced each other across a dinner table during a G20 meeting in Buenos Aires, Argentina. After what Trump called an “amazing and productive meeting,” the two leaders announced a truce in the ongoing trade war between their countries, following months of accusations, tariffs, and mounting retaliation. The U.S. agreed to postpone for 90 days an increase from 10% to 25% in tariffs applied to a large number of Chinese goods, which had been initially scheduled for January 1, 2019. In exchange, the White House announced that China would purchase a “very substantial” amount of agricultural and other products from the United States, adding that it expected the two nations “to immediately begin negotiations on structural changes with respect to forced technology transfer, intellectual property protection, non-tariff barriers, cyber intrusions and cyber theft, services, and agriculture.” The Chinese government simply stated that it was “willing to expand imports according to the needs of the domestic market“ and that it hoped to “reach a concrete agreement on mutual benefit and win-win as soon as possible." Despite Trump’s assurances that China was sending “very strong signals” after the meeting, the outcome of the negotiations was highly uncertain. Would China provide enough concessions to satisfy the demands of the U.S.? Would the U.S. back down? Or would the trade war escalate, causing unprecedented disruptions -and opportunities- in global trade patterns?

Keywords: Trade War; Trump; current account; NAFTA; balance of payments; Intellectual Property Protection; Trade; Macroeconomics; Economic Slowdown and Stagnation; United States; China;

Citation:

Cavallo, Alberto, Mariana Cal, and Anne Laski. "The U.S. - China Trade War." Harvard Business School Case 719-034, February 2019. (Revised March 2019.) View Details

Cite View Details Educators

As 2018 drew to a close, India prepared to once again carry out the largest democratic exercise in human history, as in less than six months more than 850 million eligible voters would have the chance to choose their representatives to the Lok Sabha—the country’s lower house of parliament—and, thus, their country’s Prime Minister and cabinet.[i] The election would pit the ruling party—the Bharatiya Janata Party (Indian People’s Party, known as the BJP) led by Prime Minister Narendra Modi—against a collection of parties that included the once-dominant Indian National Congress party (Congress). The 2019 elections would serve as a referendum on Modi’s first term in office and, therefore, on a high stakes question: had India’s implausibly robust democracy produced the right leader for the right moment, or had it taken the wrong path?

Faculty & Research

Currency Unions, Product Introductions, and the Real Exchange Rate

Abstract

Citation:

Supplemental Information

About the Author

More from the Author