A model of the Federal Reserve Act under the international gold standard system

This paper studies the role played by distribution costs in shaping the behavior of the real exchange rate during exchange-ratebased stabilizations. We document that distribution costs are very large for the average consumer good: they represent more than 40% of the retail price in the US and roughly 60% of the retail price in Argentina. Distribution services require local labor and land so they drive a natural wedge between retail prices in different countries. We show that introducing a distribution sector in an otherwise standard model of exchange-rate-based stabilizations dramatically improves its ability to rationalize observed real exchange rate dynamics.