Accounting for City Real Exchange Rates: The Case of Pakistan

Abstract

In this study we scrutinize the role of traded and non-traded goods in the fluctuations of city real exchange rates in Pakistan. We decompose the city real exchange rates into traded and non-traded goods by Mean Square Error (MSE). We consider 17 cities and compute 272 bilateral real exchange rates, to find the proportion of traded and non-traded goods in variation real exchange rates at different horizons of data. Our findings suggest that non-traded goods averagely explains 25% to 30% of the fluctuations of city real exchange rates in Pakistan. This would be the first study which constructed the traded and non-traded price indices and analyses their contribution in city exchange rates