On Cross-Country Differences in the Contribution of Nontraded Goods to Real Exchange Rate Fluctuations
- PDF / 747,214 Bytes
- 29 Pages / 439.37 x 666.142 pts Page_size
- 2 Downloads / 150 Views
On Cross-Country Differences in the Contribution of Nontraded Goods to Real Exchange Rate Fluctuations Erick M. Kitenge 1 & A. K. M. Mahbub Morshed 2 # Springer Science+Business Media, LLC, part of Springer Nature 2020
Abstract We propose a new Quantity Dual Approach (QDA) to estimate the contribution of nontraded goods to Real Exchange Rate (RER) fluctuations. This method is immune to the bias resulting from the non-inclusion of some goods in CPI calculations and can be applied even in a stringent data environment where Engel’s (1999, JPE) approaches would not be possible to implement. The QDA requires only national income accounts data and traded good price indices, which are more reasonably available for many countries. The estimated contributions of nontraded goods to RER fluctuations using both our proposed new approach and Engel’s approaches yield negative correlations with income level, government expenditure, exchange rate volatility, and political stability but positive correlations with inflation and private consumption expenditures. JEL Classification F3 . F4 . O1 Keywords Real exchange rate . Nontraded goods . Quantity dual approach
We would like to thank an anonymous referee, an associate editor, the editor-in-chief, and Charles Engel for their valuable suggestions on earlier drafts. The standard disclaimers apply
* A. K. M. Mahbub Morshed [email protected] Erick M. Kitenge [email protected]
1
College of Business, Central State University, Wilberforce, OH 45384, USA
2
Department of Economics, Southern Illinois University, Mailcode 4515, Carbondale, IL 62901, USA
Kitenge E.M., Morshed A.K.M.M.
1 Introduction We propose a Quantity Dual Approach (QDA) to estimate contributions of nontraded goods to Real Exchange Rates (RER) fluctuations. This approach is essentially the application of Hsieh’s (1999) dual approach of growth accounting in the context of RER decomposition. The proposed approach requires only national income accounts data and traded goods prices for a country, and thus allows one to include more countries in a study. Moreover, by using quantity variables that are inclusive of all goods and services in the economy, the QDA approach is immune from bias engendered from the uses of a limited number of commodities in CPI calculations (Crucini and Landry 2019). We also examine the roles that macroeconomic variables could play on the cross-country variations in the contributions of nontraded goods to RER fluctuations. The RER is the cost of a reference basket of goods and services relative to the costs of the same basket in another country expressed in a common currency. The prices of these goods and services included in these baskets can impact the overall RER differently, depending upon the origins of the shocks (Martin et al. 2018). The RER is used as a crucial measure of international competitiveness. Therefore, a better understanding of the roles played by different components of the overall RER would increase the ability of policymakers to steer the state of international comp
Data Loading...
