Discussion Paper Details

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Title: Distribution Costs and Real Exchange Rate Dynamics During Exchange-Rate-Based Stabilization

Author(s): Ariel Tomas Burstein, Joao C Neves and Sérgio Rebelo

Publication Date: September 2001

Keyword(s): distribution, fixed exchange rates, inflation, Real exchange rate and stabilization

Programme Area(s): International Macroeconomics

Abstract: This Paper studies the role played by distribution costs in shaping the behaviour of the real exchange rate during exchange-rate-based stabilizations. We document that distribution costs are very large for the average consumer good: the represent more than 40% of the retail price in the US and 60% of the retail price in Argentina. Distribution services require local labour and so so they drive a natural wedge between retail prices in different countries. We show that introducing a distribution sector in an otherwise standard model of exchange-rate-based stabilizations dramatically improves its ability to rationalise observed real exchange rate dynamics.

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Bibliographic Reference

Burstein, A, Neves, J and Rebelo, S. 2001. 'Distribution Costs and Real Exchange Rate Dynamics During Exchange-Rate-Based Stabilization'. London, Centre for Economic Policy Research.