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Real Exchange Rates and Time-Varying Trade Costs

Research output: Contribution to Journal/Magazine › Journal article › peer-review

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Real Exchange Rates and Time-Varying Trade Costs. / Pavlidis, Efthymios; Paya, Ivan; Peel, David.
In: Journal of International Money and Finance, Vol. 30, No. 6, 2011, p. 1157-1179.

Research output: Contribution to Journal/Magazine › Journal article › peer-review

Harvard

Pavlidis, E, Paya, I & Peel, D 2011, 'Real Exchange Rates and Time-Varying Trade Costs', Journal of International Money and Finance, vol. 30, no. 6, pp. 1157-1179. https://doi.org/10.1016/j.jimonfin.2011.06.004

APA

Pavlidis, E., Paya, I., & Peel, D. (2011). Real Exchange Rates and Time-Varying Trade Costs. Journal of International Money and Finance, 30(6), 1157-1179. https://doi.org/10.1016/j.jimonfin.2011.06.004

Vancouver

Pavlidis E, Paya I, Peel D. Real Exchange Rates and Time-Varying Trade Costs. Journal of International Money and Finance. 2011;30(6):1157-1179. doi: 10.1016/j.jimonfin.2011.06.004

Author

Pavlidis, Efthymios ; Paya, Ivan ; Peel, David. / Real Exchange Rates and Time-Varying Trade Costs. In: Journal of International Money and Finance. 2011 ; Vol. 30, No. 6. pp. 1157-1179.

Bibtex

@article{336c9fa999814ac7ac7fd9a2fd5433e0,
title = "Real Exchange Rates and Time-Varying Trade Costs",
abstract = "This paper re-examines the empirical modeling of Purchasing Power Parity (PPP) deviations in the presence of commodity market frictions. First, we show that a specific type of smooth transition models can closely approximate the functional form of the theoretical adjustment mechanism derived by Dumas (1992) [Dynamic Equilibrium and the Real Exchange Rate in a Spatially Separated World, Review of Financial Studies,5:2153–180] for the case of constant as well as changing trade costs. Second, we develop, for the first time, an empirical model of the real exchange rate which allows for changes in the degree of market integration. By employing a long span of data on the Dollar-Sterling real exchange rate and a micro-founded proxy for trade frictions, we provide novel evidence of a significant relationship between the persistence of the real exchange rate and the level of trade costs. This finding suggests that both the difficulty of detecting PPP and the extend of Rogoff{\textquoteright}s puzzle vary over time with the degree of trade restrictiveness. Finally, we highlight policy repercussions of our results.",
author = "Efthymios Pavlidis and Ivan Paya and David Peel",
year = "2011",
doi = "10.1016/j.jimonfin.2011.06.004",
language = "English",
volume = "30",
pages = "1157--1179",
journal = "Journal of International Money and Finance",
issn = "0261-5606",
publisher = "Elsevier BV",
number = "6",

}

RIS

TY - JOUR

T1 - Real Exchange Rates and Time-Varying Trade Costs

AU - Pavlidis, Efthymios

AU - Paya, Ivan

AU - Peel, David

PY - 2011

Y1 - 2011

N2 - This paper re-examines the empirical modeling of Purchasing Power Parity (PPP) deviations in the presence of commodity market frictions. First, we show that a specific type of smooth transition models can closely approximate the functional form of the theoretical adjustment mechanism derived by Dumas (1992) [Dynamic Equilibrium and the Real Exchange Rate in a Spatially Separated World, Review of Financial Studies,5:2153–180] for the case of constant as well as changing trade costs. Second, we develop, for the first time, an empirical model of the real exchange rate which allows for changes in the degree of market integration. By employing a long span of data on the Dollar-Sterling real exchange rate and a micro-founded proxy for trade frictions, we provide novel evidence of a significant relationship between the persistence of the real exchange rate and the level of trade costs. This finding suggests that both the difficulty of detecting PPP and the extend of Rogoff’s puzzle vary over time with the degree of trade restrictiveness. Finally, we highlight policy repercussions of our results.

AB - This paper re-examines the empirical modeling of Purchasing Power Parity (PPP) deviations in the presence of commodity market frictions. First, we show that a specific type of smooth transition models can closely approximate the functional form of the theoretical adjustment mechanism derived by Dumas (1992) [Dynamic Equilibrium and the Real Exchange Rate in a Spatially Separated World, Review of Financial Studies,5:2153–180] for the case of constant as well as changing trade costs. Second, we develop, for the first time, an empirical model of the real exchange rate which allows for changes in the degree of market integration. By employing a long span of data on the Dollar-Sterling real exchange rate and a micro-founded proxy for trade frictions, we provide novel evidence of a significant relationship between the persistence of the real exchange rate and the level of trade costs. This finding suggests that both the difficulty of detecting PPP and the extend of Rogoff’s puzzle vary over time with the degree of trade restrictiveness. Finally, we highlight policy repercussions of our results.

U2 - 10.1016/j.jimonfin.2011.06.004

DO - 10.1016/j.jimonfin.2011.06.004

M3 - Journal article

VL - 30

SP - 1157

EP - 1179

JO - Journal of International Money and Finance

JF - Journal of International Money and Finance

SN - 0261-5606

IS - 6

ER -