Uncertainty, Exchange Rate Regimes, and National Price Levels

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Staff Reports

Uncertainty, Exchange Rate Regimes, and National Price Levels

August 2002 Number 151

JEL classification: E52, F33, F41

Author: Christian Broda

Large differences in national price levels exist across countries. In this paper, I develop a general equilibrium model predicting that these differences should be related to countries' exchange rate regimes. My empirical findings confirm that countries with fixed exchange rate regimes have higher national price levels than countries with flexible regimes. At the disaggregate level, the relationship between exchange rate regimes and national price levels is stronger for nontraded goods than for traded goods. I also find that measuring the misalignment in national price levels around times of regime shifts without considering a break in its equilibrium value results in the overestimation of the true misalignment.

Available only in PDF PDF

41 pages / 345 kb

For a published version of this report, see Christian Broda, "Exchange Rate Regimes and National Price Levels," Journal of International Economics 70, no. 1 (September 2006): 52-81.

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