Distribution Costs

NBER WORKING PAPER SERIES
DISTRIBUTION COSTS AND REAL EXCHANGE RATE
DYNAMICS DURING EXCHANGE-RATE-BASED-STABILIZATIONS
Ariel T. Burstein
João C. Neves
Sergio Rebelo
Working Paper 7862
http://www.nber.org/papers/w7862
NATIONAL BUREAU OF ECONOMIC RESEARCH
1050 Massachusetts Avenue
Cambridge, MA 02138
August 2000
We are thankful to Vanessa Broda for providing us with price data for Argentina, to Federico Dorm for
information on the construction of Argentine data, and to Martin Eichenbaum, Charles Engel, and Henry Siu
for their comments. The views expressed herein are those of the authors and not necessarily those of the
National Bureau of Economic Research.
2000 by Ariel T. Burstein, JoAo C. Neves, and Sergio Rebelo. All rights reserved. Short sections of text,
not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including
notice, is given to the source.
Distribution Costs and Real Exchange Rate Dynamics During
Exchange-Rate-Based-Stabilizations
Ariel T. Burstein, João C. Neves, and Sergio Rebelo
NBER Working Paper No. 7862
August 2000
JELNo. F41
ABSTRACT
This paper studies the role played by the distribution sector in shaping the behavior of the real
exchange rate during exchange-rate-based-stabilizations. We use data for the U.S. and Argentina to
document the importance of distribution margins in retail prices and disaggregated price data to study
price dynamics in the aftermath of Argentina's 1991 Convertibility plan. Distribution services require
local labor and land so they drive a natural wedge between retail prices in different countries. We study
in detail the impact of introducing a distribution sector in an otherwise standard model of exchange-ratebased-
stabilizations. We show that this simple extension improves dramatically the ability of the model
to rationalize observed real exchange rate dynamics.
Ariel T. Burstein João C. Neves
Department of Economics Universidade Católica... [continues]

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