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  • 2019
  • Working Paper
  • HBS Working Paper Series

Real Exchange Rate Behavior: New Evidence from Matched Retail Goods

By: Alberto Cavallo, Brent Neiman and Roberto Rigobon
  • Format:Print
  • | Language:English
  • | Pages:47
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Abstract

We use a dataset containing daily prices for thousands of matched retail products in nine countries to study tradable-goods real exchange rates. Prices were collected from the websites of large multi-channel retailers and then carefully matched into narrowly-defined product categories, providing relative price levels data that collectively represent the bulk of expenditures on food, fuel, and consumer electronics in each country. Using bilateral results with the US, we show that relative prices in local currencies co-move closely with nominal exchange rates. Exchange-rate passthrough into relative prices is approximately 75%, compared to 30% with CPI data for the same countries and time periods. We decompose the difference and show that the majority of the difference – about 25 percentage points –comes from the use of closely-matched products. The rest of the gap owes about equally to the exclusion of non-tradable sub-categories and to our inclusion of entering and exiting goods. These results suggest that the retail prices for tradable goods can adjust quickly to nominal exchange rate movements and vice-versa, and have important implications for a vast literature that tries to characterize both the level and behavior of real exchange rates over time.

Keywords

Purchasing Power Parity; Online Prices; Real Exchange Rate; Macroeconomics; Currency Exchange Rate; Price; Internet and the Web

Citation

Cavallo, Alberto, Brent Neiman, and Roberto Rigobon. "Real Exchange Rate Behavior: New Evidence from Matched Retail Goods." Harvard Business School Working Paper, No. 20-040, January 2019.
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About The Author

Alberto F. Cavallo

Business, Government and the International Economy
→More Publications

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