We study the quarterly bilateral real exchange rate and the relative price of non-traded to traded goods for 1225 country pairs over 1980-2005. We show that the two variables are positively correlated, but that movements in the relative price measure are smaller than those in the real exchange...

This paper uncovers a striking empirical regularity: the consumer price of a good relative to a different good within a country tends to be much less variable than the price of that good relative to a similar good in another country. This fact seems to hold for all goods except very simple,...

This paper analyzes the role of relative prices in the conduct of wage indexation and monetary policy in a small economy producing traded and non-traded goods under a flexible exchange rate regime. It is shown that the beneficial effect of using relative prices in addition to aggregate prices as...

The Consumer Price Index does not take into account the fact that consumers alter the composition of their purchases in response to changes in relative prices. This substitution effect will cause the CPI to grow faster than the cost of living. This paper presents new estimates showing that this...

Estimated effects of relative prices on trade shares are presented in this paper for 64 countries. The equations are estimated using pooled time series, cross section data under the assumption that the error term is serially correlated across time and heteroskedastic across countries. The...

It is well known that business cycles in OECD countries exhibit a remarkable degree of synchronization. Much less known is that the peak of the OECD cycle is associated with high prices of labour-intensive products and low prices of capital-intensive ones. We document this cyclical behavior of...

A decrease in aggregate demand at given prices and wages decreases output and employment. The decrease in employment exerts downward pressure on real wages. The decrease in production exerts downward pressure on markups. With perfectly synchronized price and wage decisions, nominal wages and...

The positive correlation between PPP investment rates and PPP income levels across countries is one of the most robust findings of the empirical growth literature. We show that this relationship is almost entirely driven by differences in the price of investment relative to output across...

A risk-averse entrepreneur with access to a profitable venture needs to raise funds from investors. She cannot indefinitely commit her human capital to the venture, which limits the firm's debt capacity, distorts investment and compensation, and constrains the entrepreneur's risk-sharing. This...