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The Efficiency of the Global Markets for Final Goods and Productive Capabilities

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  • Georg H. Strasser

    () (Department of Economics, Boston College)

Abstract

Slow mean reversion of real exchange rates is commonly considered a result of border frictions that remain despite integration of financial and goods markets. This paper shows that even if border frictions decline, a contemporaneous decline in output shock variance can in fact slow down mean reversion. It proposes a new method of estimating border cost from time-series data only, without relying on within-country variation. Applying this method to the real exchange rate of final goods and a novel measure of the real exchange rate for productive capabilities, such as technology and know-how, gives very differential border cost estimates. During the years 1974–2008, a relocation reduces productive capability by 22% for the average country pair, whereas final goods by only 15%. The real exchange rate for final goods takes more than two years to revert to purchasing power parity, more than twice as long as productive capabilities.

Suggested Citation

  • Georg H. Strasser, 2010. "The Efficiency of the Global Markets for Final Goods and Productive Capabilities," Boston College Working Papers in Economics 766, Boston College Department of Economics, revised 31 Jan 2012.
  • Handle: RePEc:boc:bocoec:766
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    Keywords

    Border Effect; Real Exchange Rate; PPP; Technology Spillover; Indirect Inference;

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation

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