This short article examines the contribution of fluctuations in prices of nontradable goods relative to tradable goos vis-a-vis fluctuations in exchange-rate-adjusted relative prices of tradable goods for explaining the variability of the real exchange rate of the Mexican peso against the U.S. dollar. The exercise is motivated by the results reported in Engel (2000) for the

This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. This paper shows that the dominant view that the high variability of real exchange rates is due to movements in exchange rate-adjusted prices of tradable goods does not hold for Mexican data for periods with a managed exchange rate. The relative price of nontradables accounts for up to 70 percent of real exchangerate variability during these periods. The paper also proposes a model in which this fact, and the sudden stops that accompanied the collapse of Mexico’s managed exchange rates, could result from a Fisherian debt-deflation mechanism operating via nontradables prices in economies with dollarized liabilities.

ABSTRACT: The evidence for a productivity-based explanation for real exchange rate behavior of East Asian currencies is examined. Using sectoral output and employment data, relative prices

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The law of one price, or purchasing power parity in its aggregate form, provides a cornerstone for much of international economics. Not too surprisingly, its empirical validity has attracted strong interest. The consensus view has shifted over time; while early studies tended to reject PPP, the availability of longer time series and advances in econometric methodology have recently tilted the balance of evidence in favour of

This paper was completed while the author was a resident fellow at the Rockefeller