Trade Costs and Real Exchange Rate Volatility: The Role of Ricardian Comparative Advantage

This paper examines the impact of trade costs on real exchange rate volatility. We incorporate a multi-country Ricardian model of trade, based on the work of Eaton and Kortum (2002), into a macroeconomic model to show how bilateral real exchange rate volatility depends on relative technological diff...

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Bibliographic Details
Corporate Author: International Monetary Fund (Author)
Format: Electronic eBook
Language:English
Published: Washington, D.C International Monetary Fund 2005
Series:IMF Working Papers Working Paper No. 05/5
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Summary:This paper examines the impact of trade costs on real exchange rate volatility. We incorporate a multi-country Ricardian model of trade, based on the work of Eaton and Kortum (2002), into a macroeconomic model to show how bilateral real exchange rate volatility depends on relative technological differences and trade costs. These differences highlight a new channel, in which the similarity of a pair of countries'' set of suppliers of traded goods affects bilateral exchange rate volatility. We then test the importance of this channel using a large panel of cross-country data over 1970-97, and find strong evidence supporting the channel
Physical Description:1 Online-Ressource (43 p)
ISBN:1451860242
9781451860245

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