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Large Devaluations and the Real Exchange Rate

Ariel Burstein, Martin Eichenbaum and Sergio Rebelo
Journal of Political Economy
Vol. 113, No. 4 (August 2005), pp. 742-784
DOI: 10.1086/431254
Stable URL: http://www.jstor.org/stable/10.1086/431254
Page Count: 43
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Large Devaluations and the Real Exchange Rate
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Abstract

In this paper we argue that the primary force behind the large drop in real exchange rates that occurs after large devaluations is the slow adjustment in the prices of nontradable goods and services. Our empirical analysis uses data from five large devaluation episodes: Argentina (2002), Brazil (1999), Korea (1997), Mexico (1994), and Thailand (1997). We conduct a detailed analysis of the Argentinian case using disaggregated consumer price index data, data from our own survey of prices in Buenos Aires, and scanner data from supermarkets. We assess the robustness of our findings by studying large real exchange rate appreciations, medium devaluations, and small exchange rate movements.

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