Market Structure and the Persistence of Sectoral Real Exchange Rates

We examine the relationship between market structure and the persistence of US dollar-based sectoral real exchange rates for 14 OECD countries. Our empirical results based on disaggregated data suggest that differences in market structure significantly determine the rates at which deviations from sectoral purchasing power parity decay. Specifically, industries with a larger price-cost margin are found to exhibit slower parity reversion of their sectoral real exchange rates. Further, as the degree of intra-industry trade activity increases, sectoral real exchange rate persistence becomes more pronounced. These findings suggest that an imperfectly competitive market structure contributes to the well-documented persistence in real exchange rates. Copyright @ 2001 by John Wiley & Sons, Ltd. All rights reserved.