NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Distribution Costs and Real Exchange Rate Dynamics During Exchange-Rate-Based-Stabilizations

Ariel T. Burstein, Joao C. Neves, Sergio Rebelo

NBER Working Paper No. 7862
Issued in August 2000
NBER Program(s):   EFG   IFM

This paper studies the role played by the distribution sector in shaping the behavior of the real exchange rate during exchange-rate-based-stabilizations. We use data for the U.S. and Argentina to document the importance of distribution margins in retail prices and disaggregated price data to study price dynamics in the aftermath of Argentina's 1991 Convertibility plan. Distribution services require local labor and land so they drive a natural wedge between retail prices in different countries. We study in detail the impact of introducing a distribution sector in an otherwise standard model of exchange-rate-based-stabilizations. We show that this simple extension improves dramatically the ability of the model to rationalize observed real exchange rate dynamics.

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Document Object Identifier (DOI): 10.3386/w7862

Published: Burstein, Ariel T., Joao C. Neves and Sergio Rebelo. "Distribution Costs And Real Exchange Rate Dynamics During Exchange-Rate-Based Stabilizations," Journal of Monetary Economics, 2003, v50(6,Sep), 1189-1214.

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