Trade Costs and Real Exchange Rate Volatility: The Role of Ricardian Comparative Advantage
IMF Working Papers, January 1, 2005
Source details
- Canonical URL
- Trade Costs and Real Exchange Rate Volatility: The Role of Ricardian Comparative Advantage
Other formats
Bibliographic details
- Published: January 1, 2005
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451860245.001
Summary
- Examines the impact of trade costs on real exchange rate volatility.
- Incorporates a multi-country Ricardian model of trade, based on Eaton and Kortum (2002), into a macroeconomic model.
- Identifies a new channel: the similarity of a pair of countries' set of suppliers of traded goods affects bilateral exchange rate volatility.
- Tests the importance of this channel using a large panel of cross-country data over 1970-97 and finds strong evidence supporting the channel.
Methodology
- Theoretical framework: multi-country Ricardian model of trade integrated with a macroeconomic model, building on Eaton and Kortum (2002).
- Empirical approach: large panel of cross-country data covering 1970-97 to test the model’s implications.
Key Findings
- Bilateral real exchange rate volatility depends on:
- Relative technological differences between countries.
- Trade costs.
- A distinct channel operates through the similarity in countries' sets of suppliers of traded goods: greater similarity influences bilateral exchange rate volatility.
- Empirical tests using 1970-97 cross-country panel data provide strong evidence in favor of the identified channel.
Content in this bundle
- Determinants of Bilateral Real Exchange Rate Volatility