Nonlinear Adjustment in Law of One Price Deviations and Physical Characteristics of Goods
At a level of individual goods, heterogeneity of marginal transaction costs, proxied by price-to-weight ratios and stowage factors, explains a large part of the variation in thresholds of no-adjustment and conditional half-lives of law of one price deviations. Prices of heavier (more voluminous) goods deviate further before becoming mean-reverting. Moreover, after becoming mean-reverting, prices of heavier goods converge more slowly. Together with measures of pricing power, market size, distance, and exchange rate volatility, these factors explain up to 43% of variation in no-adjustment threshold estimates across 52 goods in US-Canada post-Bretton Woods monthly CPI data and are robust in a broader five-country dataset. They open two avenues for the importance of marginal transaction costs in accounting for real exchange rate persistence: through (a) generating persistence in individual real exchange rate components, and (b) accentuating it by the aggregation of heterogeneous components ("aggregation bias" of <link rid="b18">Imbs et al., 2005a</link>). Copyright © 2009 The Author. Journal compilation © Blackwell Publishing Ltd 2009.
Year of publication: |
2009
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Authors: | Berka, Martin |
Published in: |
Review of International Economics. - Wiley Blackwell, ISSN 0965-7576. - Vol. 17.2009, 1, p. 51-73
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Publisher: |
Wiley Blackwell |
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