DP2944 Distribution Costs and Real Exchange Rate Dynamics During Exchange-Rate-Based Stabilization
|Author(s):||Ariel Tomas Burstein, Joao C Neves, Sérgio Rebelo|
|Publication Date:||September 2001|
|Keyword(s):||distribution, fixed exchange rates, inflation, Real exchange rate, stabilization|
|Programme Areas:||International Macroeconomics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=2944|
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.