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Real Exchange Rates and Time-Varying Trade Costs

Previous empirical work on the Purchasing Power Parity does not explicitly account for time-varying trade costs. Motivated by the recent gravity literature we incorporate a microfounded measure of trade costs into two nonlinear regression models for the real exchange rate. Using data for the dollar-sterling real exchange rate from 1830 to 2005, we provide significant evidence in favor of a positive relation between the level of trade costs and the degree of persistence of the real exchange rate.

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File URL: http://www.lancaster.ac.uk/media/lancaster-university/content-assets/documents/lums/economics/working-papers/TradeCosts.pdf
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Paper provided by Lancaster University Management School, Economics Department in its series Working Papers with number 600537.

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Date of creation: 2009
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Handle: RePEc:lan:wpaper:600537
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