At the aggregate level, the evidence that deviations from purchasing power parity (PPP) are too persistent to be explained solely by nominal rigidities has long been a puzzle (Rogoff, 1996). Another puzzle from the micro price evidence of the law of one price (LOP), which is the basic building...

The real exchange rate (RER) measures relative price levels across countries, capturing deviations from purchasing power parity (PPP). RER is a key variable in international macroeconomic models as it is central to equilibrium conditions in both goods and asset markets. It is also one of the...

We introduce the real exchange rate volatility curve as a useful device to understand the role of price stickiness in accounting for deviations from the Law of One Price at the sector level. In the presence of both nominal and real shocks, the theory predicts that the real exchange rate...

We develop a model of cities each inhabited by two agents, one specializing in manufacturing, the other in distribution. The distribution sector represents the physical transformation of all internationally traded goods from the factory gate to the final consumer. Using a panel of micro-prices...

Volatile and persistent real exchange rates are observed not only in aggregate series but also in the individual good level data. Kehoe and Midrigan (2007) recently showed that, under a standard assumption on nominal price stickiness, empirical frequencies of micro price adjustment cannot...

We propose a dynamic general equilibrium model of exchange rate determination, which simultaneously accounts for all major puzzles associated with nominal and real exchange rates. This includes the Meese-Rogoff disconnect puzzle, the PPP puzzle, the terms-of-trade puzzle, the Backus- Smith...

We provide three sets of variance decompositions on microeconomic international relative price data. The first shows that the overall distribution of absolute deviations from the Law of One Price (LOP) is dominated by cross-sectional variation in long-term averages, not by time-series variation...

The classical dichotomy predicts that all of the time series variance in the aggregate real exchange rate is accounted for by non-traded goods in the CPI basket because traded goods obey the Law of One Price. In stark contrast, Engel (1999) found that traded goods had comparable volatility to...

Financial markets play two roles with implications for the exchange rate: they accommodate risk sharing and act as a source of shocks. In prevailing theories, these roles are seen as mutually exclusive and individually face challenges in explaining exchange rate dynamics. However, we demonstrate...

We use a general open-economy wedge-accounting framework to characterize the set of shocks that can account for major exchange rate puzzles. Focusing on a near-autarky behavior of the economy, we show analytically that all standard macroeconomic shocks -- including productivity, monetary,...