TY  - JOUR
AU  - Crucini,Mario J.
AU  - Telmer,Christopher I.
TI  - Microeconomic Sources of Real Exchange Rate Variability
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 17978
PY  - 2012
Y2  - April 2012
UR  - http://www.nber.org/papers/w17978
L1  - http://www.nber.org/papers/w17978.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

Christopher Telmer
Tepper School of Business
Frew and Tech Streets
Carnegie-Mellon University
Pittsburgh, PA 15213
E-Mail: chris.telmer@cmu.edu
AB  - We provide three sets of variance decompositions on microeconomic international relative price data. The first shows that the overall distribution of absolute deviations from the Law of One Price (LOP) is dominated by cross-sectional variation in long-term averages, not by time-series variation around the long-term averages. The second shows that time-series variation in changes in LOP deviations is dominated by idiosyncratic, goods-specific variation, not by aggregate variation such as that arising from nominal exchange rates. The third shows that time-series and cross-sectional variance are connected across goods. Goods that exhibit high cross-sectional variance also exhibit high time-series variance. Moreover, when this connection is made conditional on the tradeability of a goods, a two-factor structure for the goods-specific cross-section is revealed. We argue that this factor structure, in addition to our other variance decompositions, is informative for the construction of models that can synthesize the micro and macroeconomic behavior of relative prices.
ER  -