Real exchange rate fluctuations and the relative importance of nontradables

Abstract

The real exchange rate is one of the most important price variables in macroeconomics as changes in it have implications for both external competitiveness as well as internal sectoral resource allocation. This paper decomposes real exchange rate volatility into its two components for a panel of 51 economies over the period 1990-2010 and specifically estimates the relative importance of internal prices in real exchange rate fluctuations. Unlike other studies, this paper goes a step further and examines the role of a set of economic fundamentals in explaining the relative contribution of the non-traded component in real exchange rate fluctuations. © 2012 Elsevier Ltd.