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Non-linear adjustment in law of one price deviations and physical characteristics of goods

Martin Berka ()

MPRA Paper from University Library of Munich, Germany

Abstract: 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 5-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 process of aggregation of heterogeneous components (”aggregation bias” of Imbs, et al. 2005).

Keywords: Law of One Price Deviations; Real Exchange Rate Persistence; Non-Linearities; transaction costs; Physical Weight; Physical Volume; Threshold Autregres-sive Models (search for similar items in EconPapers)
JEL-codes: F36 F31 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba and nep-ifn
Date: 2006-11, Revised 2007-12
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Journal Article: Nonlinear Adjustment in Law of One Price Deviations and Physical Characteristics of Goods (2009) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:8606

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