TY  - JOUR
AU  - Crucini,Mario J.
AU  - Shintani,Mototsugu
AU  - Tsuruga,Takayuki
TI  - Do Sticky Prices Increase Real Exchange Rate Volatility at the Sector Level?
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 16081
PY  - 2010
Y2  - June 2010
DO  - 10.3386/w16081
UR  - http://www.nber.org/papers/w16081
L1  - http://www.nber.org/papers/w16081.pdf
N1  - Author contact info:
Mario J. Crucini
Department of Economics
Vanderbilt University
Box 1819 Station B
Nashville, TN 37235-1819
Tel: 615/322-7357
Fax: 615/343-8459
E-Mail: mario.j.crucini@vanderbilt.edu

Mototsugu Shintani
Department of Economics
Vanderbilt University
Box 1819 Station B
Nashville, TN 37235-1819
E-Mail: mototsugu.shintani@vanderbilt.edu

Takayuki Tsuruga
Graduate School of Economics, Kyoto University
Yoshida Honmachi Sakyo-ku, Kyoto 606-8501
JAPAN
E-Mail: tsuruga@econ.kyoto-u.ac.jp
AB  - We introduce the real exchange rate volatility curve as a useful device to understand the role of price stickiness in accounting for deviations from the Law of One Price at the sector level. In the presence of both nominal and real shocks, the theory predicts that the real exchange rate volatility curve is a U-shaped function of the degree of price stickiness. Using sector-level European real exchange rate data and frequency of price changes, we estimate the volatility curve. The results are consistent with the predominance of real effects over nominal effects. Nonparametric analysis suggests the curve is convex and negatively sloped over the majority of its range. Good-by-good variance decompositions show that the relative contribution of nominal shocks is smaller at the sector level than what previous studies have found at the aggregate level. We conjecture that this is due to significant averaging out of good-specific real microeconomic shocks in the process of aggregation.
ER  -