Goods arbitrage and real exchange rate stationarity
AbstractRecent evidence suggests that while real exchange rates exhibit mean reversion, the reversion only sets in once a minimum "threshold" distance from the mean has been exceeded. The non-linearity has generally been attributed to costly arbitrage, which requires a minimum divergence before the costs of arbitrage can be recouped. In this paper, we examine this reasoning. If arbitrage was indeed the cause of mean reversion, one would expect to see a quantity respose of trade flows at the thresholds. We conduct an array of formal and informal tests of the presence of such quantity responses. We fail to unearth any significant evidence of trade flows changing at the points of mean reversion. Alternative explanations of mean reversion, notably exchange market intervention, would thus seem to warrant further attention. JEL classification:
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Oesterreichische Nationalbank (Austrian Central Bank) in its series Working Papers with number 29.
Length: 37 pages
Date of creation: 30 Jun 1998
Date of revision:
Postal: Oesterreichische Nationalbank, Economic Studies Division, c/o Beate Hofbauer-Berlakovich, POB 61, A-1011 Vienna, Austria
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Maurice Obstfeld and Alan M. Taylor., 1997.
"Nonlinear Aspects of Goods-Market Arbitrage and Adjustment: Heckscher's Commodity Points Revisited,"
Center for International and Development Economics Research (CIDER) Working Papers
C97-088, University of California at Berkeley.
- Obstfeld, Maurice & Taylor, Alan M., 1997. "Nonlinear Aspects of Goods-Market Arbitrage and Adjustment: Heckscher's Commodity Points Revisited," Journal of the Japanese and International Economies, Elsevier, vol. 11(4), pages 441-479, December.
- Maurice Obstfeld & Alan M. Taylor, 1997. "Nonlinear Aspects of Goods-Market Arbitrage and Adjustment: Heckscher's Commodity Points Revisited," NBER Working Papers 6053, National Bureau of Economic Research, Inc.
- Obstfeld, Maurice & Taylor, Alan M, 1997. "Nonlinear Aspects of Goods-Market Arbitrage and Adjustment: Heckscher's Commodity Points Revisited," CEPR Discussion Papers 1672, C.E.P.R. Discussion Papers.
- Parsley, David C & Wei, Shang-Jin, 1996.
"Convergence to the Law of One Price without Trade Barriers or Currency Fluctuations,"
The Quarterly Journal of Economics,
MIT Press, vol. 111(4), pages 1211-36, November.
- David C. Parsley & Shang-Jin Wei, 1996. "Convergence to the Law of One Price Without Trade Barriers or Currency Fluctuations," NBER Working Papers 5654, National Bureau of Economic Research, Inc.
- Isard, Peter, 1977. "How Far Can We Push the "Law of One Price"?," American Economic Review, American Economic Association, vol. 67(5), pages 942-48, December.
- Charles Engel & Michael K. Hendrickson & John H. Rogers, 1997.
"Intra-National, Intra-Continental, and Intra-Planetary PPP,"
NBER Working Papers
6069, National Bureau of Economic Research, Inc.
- Charles Engel & Michael K. Hendrickson & John H. Rogers, 1997. "Intra-national, intra-continental, and intra-planetary PPP," International Finance Discussion Papers 589, Board of Governors of the Federal Reserve System (U.S.).
- Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
- Benninga, Simon & Protopapadakis, Aris, 1988. "The equilibrium pricing of exchange rates and assets when trade takes time," Journal of International Money and Finance, Elsevier, vol. 7(2), pages 129-149, June.
- Froot, Kenneth A. & Rogoff, Kenneth, 1995.
"Perspectives on PPP and long-run real exchange rates,"
Handbook of International Economics,
in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 32, pages 1647-1688
- Kenneth A. Froot & Kenneth Rogoff, 1996. "Perspectives on PPP and Long-Run Real Exchange Rates," NBER Working Papers 4952, National Bureau of Economic Research, Inc.
- Mark P. Taylor, 2003. "Purchasing Power Parity," Review of International Economics, Wiley Blackwell, vol. 11(3), pages 436-452, 08.
- Dumas, Bernard, 1992. "Dynamic Equilibrium and the Real Exchange Rate in a Spatially Separated World," Review of Financial Studies, Society for Financial Studies, vol. 5(2), pages 153-80.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Markus Knell and Helmut Stix).
If references are entirely missing, you can add them using this form.