{
  "title": "Real Exchange Rate and External Balance: How Important Are Price Deflators?",
  "publication": "IMF Working Papers, March 30, 2017",
  "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2017/03/30/real-exchange-rate-and-external-balance-how-important-are-price-deflators-44780",
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  "summary": "This paper contrasts real exchange rate (RER) measures based on different deflators (CPI, GDP deflator, and ULC) and discusses potential implications for the link—or lack thereof—between RER and external balance.",
  "sections": [
    {
      "heading": "Main findings",
      "content": "- The choice of deflator plays a significant role in RER movements.\n- An empirical investigation based on 35 developed and emerging market economies over 1995 to 2014 yields comprehensive and robust evidence that only the RER deflated by ULC exhibits contemporaneous patterns consistent with the expenditure-switching mechanism.\n- A simple model featuring nominal rigidity and trade in intermediate goods (as in Obstfeld (2001) and Devereux and Engel (2007)) is shown to generate qualitatively identical patterns to the empirical findings."
    },
    {
      "heading": "Theoretical rationale",
      "content": "- Model features:\n  - Nominal rigidity.\n  - Trade in intermediate goods.\n- The modeled mechanism reproduces the qualitative patterns observed empirically, providing a theoretical rationale for why ULC-based RER measures align with expenditure-switching."
    },
    {
      "heading": "Implications",
      "content": "- Measurement: Researchers and policymakers should be aware that different deflators (CPI, GDP deflator, ULC) can lead to materially different RER dynamics.\n- Interpretation of RER–external balance link: Evidence that only ULC-deflated RERs align with expenditure-switching suggests caution when using CPI- or GDP-deflator-based RERs to infer contemporaneous expenditure-switching effects."
    },
    {
      "heading": "Publication and metadata",
      "content": "- Authors: JaeBin Ahn, Rui Mano, Jing Zhou\n- Date: March 30, 2017\n- Series: Working Paper No. 2017/081\n- Volume: 2017\n- Issue: 081\n- Pages: 49\n- DOI: https://doi.org/10.5089/9781475590500.001\n- Stock No: WPIEA2017081\n- ISBN: 9781475590500\n- ISSN: 1018-5941\n\nIMF Working Paper — \"Real Exchange Rate and External Balance: How Important Are Price Deflators?\"\n\n---\n\n Content in this bundle\n\n- Real Exchange Rate and External Balance: How Important Are Price Deflators?, WP/17/81, March 2017\n  - Real Exchange Rate and External Balance: How Important Are Price Deflators?, WP/17/81, March 2017 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - Real Exchange Rate and External Balance: How Important Are Price Deflators?, WP/17/81, March 2017 (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2017/03/30/real-exchange-rate-and-external-balance-how-important-are-price-deflators-44780"
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    "Authors: JaeBin Ahn, Rui Mano, Jing Zhou",
    "Published: March 30, 2017",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9781475590500.001",
    "The choice of deflator plays a significant role in RER movements.",
    "An empirical investigation based on 35 developed and emerging market economies over 1995 to 2014 yields comprehensive and robust evidence that only the RER deflated by ULC exhibits contemporaneous patterns consistent with the expenditure-switching mechanism.",
    "A simple model featuring nominal rigidity and trade in intermediate goods (as in Obstfeld (2001) and Devereux and Engel (2007)) is shown to generate qualitatively identical patterns to the empirical findings.",
    "Model features:",
    "The modeled mechanism reproduces the qualitative patterns observed empirically, providing a theoretical rationale for why ULC-based RER measures align with expenditure-switching.",
    "Measurement: Researchers and policymakers should be aware that different deflators (CPI, GDP deflator, ULC) can lead to materially different RER dynamics.",
    "Interpretation of RER–external balance link: Evidence that only ULC-deflated RERs align with expenditure-switching suggests caution when using CPI- or GDP-deflator-based RERs to infer contemporaneous expenditure-switching effects.",
    "Authors: JaeBin Ahn, Rui Mano, Jing Zhou",
    "Date: March 30, 2017",
    "Series: Working Paper No. 2017/081",
    "Volume: 2017",
    "Issue: 081",
    "Pages: 49",
    "DOI: https://doi.org/10.5089/9781475590500.001",
    "Stock No: WPIEA2017081",
    "ISBN: 9781475590500",
    "ISSN: 1018-5941",
    "**Real Exchange Rate and External Balance: How Important Are Price Deflators?, WP/17/81, March 2017**"
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