Disciplines

Finance and Financial Management

Abstract

We examine the relationship between the relative price of nontradables and real exchange rate movements for fixed exchange rate regimes. We have two findings. First we show that purchasing power parity holds strongly for tradables across US regions. As a result, nontradables play a central role in regional real exchange rate movements. Using BLS regional data, we find that changes in the relative price of nontradables explain up to eighty percent of regional real exchange changes over medium and long run horizons. Second, we show that nontradables can account for a large portion of real exchange rates changes internationally with high expenditure shares.