How important are nontradable goods and distribution costs to explain real exchange rate dynamics? We answer this question by estimating a gen- eral equilibrium model with intermediate and final tradable and nontrad- able goods. We obtain reasonable estimated parameter values using Bayesian methods, and find that the estimated model can match real exchange rate per- sistence and, to less extent, volatility. Nontradable sector technology shocks explain about one third of real exchange rate volatility. We present impulse responses to better understand the transmission mechanism of shocks in the open economy. We also show that in order to explain the low correlation between the ratio of relative consumption and the real exchange rates across countries, fiscal policy shocks are necessary in the model, in addition to tech- nology shocks.