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Market Structure and the Persistence of Sectoral Real Exchange Rates

  • Yin-Wong Cheung
  • Menzie D. Chinn
  • Eiji Fujii

We examine the relationship between market structure and the persistence of U.S. dollar-based sectoral real exchange rates for fourteen 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 imply that an imperfectly competitive market structure contributes to the well-documented persistence in real exchange rates.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7408.

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Date of creation: Oct 1999
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Publication status: published as Cheung, Yin-Wong and Kon S. Lai, "Mean Reversion in Real Exchange Rates," Economics Letters, Vol. 46, no. 3 (November 1994): 251-256
Handle: RePEc:nbr:nberwo:7408
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