Currency Unions, Product Introductions, and the Real Exchange Rate*

By Alberto Cavallo, Brent Neiman, Roberto Rigobon. 2014

135 citations recorded by the source corpus.

We use a novel dataset of online prices of identical goods sold by four large global retailers in dozens of countries to study good-level real exchange rates and their aggregated behavior. First, in contrast to the prior literature, we demonstrate that the law of one price holds very well within currency unions for tens of thousands of goods sold by each of the retailers, implying good-level real exchange rates often equal to one. Prices of these same goods exhibit large deviations from the law of one price outside of currency unions, even when the nominal exchange rate is pegged. This clarifies that the common currency per se, and not simply the lack of nominal volatility, is important in reducing cross-country price dispersion. Second, we derive a new decomposition that shows that good-level real exchange rates in our data predominantly reflect differences in prices at the time products are first introduced, as opposed to the component emerging from heterogeneous passthrough or from nominal rigidities during the life of the good. Further, these international relative prices measured at the time of introduction move together with the nominal exchange rate. This stands in sharp contrast to pricing behavior in models where all price rigidity for any given good is due simply to costly price adjustment for that good.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/5ae4efb930a4a739b96884e8bde33327a0d73576

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In Economics and Econometrics

Citations in the corpus

Data ex Machina: Introduction to Big Data (2017, background): “A second result of the Billion Prices Project has been to document violations of the law of one price (Cavallo et al. 2014).”
The Effect of Unconventional Fiscal Policy on Consumption Expenditure (2016, unknown): “Cavallo, Neiman, and Rigobon (2014) show firms within the euro area harmonize prices of durable goods.17 Even in this case, the parallel-trends assumption seems plausible.”
Uniform Pricing in U.S. Retail Chains* (2019, background): “(2010), Cavallo et al. (2014), Kaplan and Menzio (2015), Gagnon and López-Salido (forthcoming), and Dobson and Waterson (2008).”
The Billion Prices Project: Using Online Prices for Measurement and Research (2016, methodology): “In Cavallo, Neiman, and Rigobon (2014b) we used the introduction of the euro in Latvia in January 2014 to show that the adjustment towards the law of one price can take place within a matter of days after a country joins a currency union.”