We examine the relationship between the relative price of nontradables and real
exchange rate movements for fixed exchange rate regimes. In contrast to Engel
(1999), we find that nontradables account for a large portion of real exchange rate
changes with fixed rates. We show that this holds for intra and inter-national data
sets. Using BLS data, we find that changes in the relative price of nontradables
explain eighty percent of real exchange rate movements for US regions. In addition,
we show that they play an important role during the Bretton Woods system once we
allow for plausible expenditure shares.
