Distribution costs and real exchange rate dynamics during exchange-rate-based stabilizations

Ariel T. Burstein, João C. Neves, Sergio Rebelo*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

215 Citations (Scopus)

Abstract

This paper studies the role played by distribution costs in shaping the behavior of the real exchange rate during exchange-rate-based stabilizations. We document that distribution costs are very large for the average consumer good: they represent more than 40% of the retail price in the US and roughly 60% of the retail price in Argentina. Distribution services require local labor and land so they drive a natural wedge between retail prices in different countries. We show that introducing a distribution sector in an otherwise standard model of exchange-rate-based stabilizations dramatically improves its ability to rationalize observed real exchange rate dynamics.
Original languageEnglish
Pages (from-to)1189-1214
Number of pages26
JournalJournal of Monetary Economics
Volume50
Issue number6
DOIs
Publication statusPublished - Sep 2003

Keywords

  • Distribution
  • Fixed exchange rates
  • Inflation
  • Real exchange rate
  • Stabilization

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