Real Exchange Rates and Time-Varying Trade Costs

David A. Peel, Ivan Paya () and Efthymios G. Pavlidis

No 6028, Working Papers from Lancaster University Management School, Economics Department

Abstract: 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.

Keywords: Real Exchange Rates; Time-Varying Trade Costs; Smooth Transition Nonlinearity; Persistence; Simulation Methods (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-ifn and nep-opm
Date: 2009
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Persistent link: http://EconPapers.repec.org/RePEc:lan:wpaper:006028

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