Accounting for U.S. Regional Real Exchange Rates

We examine the relationship between the relative price of nontradables and real exchange rate movements for fixed exchange rate regimes. Using BLS CPI data, we show that purchasing power parity holds strongly for tradables across U.S. regions. As a result, nontradables play a central role in U.S. regional real exchange rate movements. Indeed changes in the relative price of nontradables explain up to 80% of regional real exchange rate changes over medium and long run horizons. We also argue that nontradables can account for a large portion of real exchange rate changes internationally with high nontradables expenditure shares.