The Efficiency of the Global Markets for Final Goods and Productive Capabilities

Georg Strasser

No 576, 2011 Meeting Papers from Society for Economic Dynamics

Abstract: Despite integration of financial and goods markets, borders still impose considerable friction on the flow of goods. This paper shows that a decline in output shock variance might increase the time of mean reversion despite declining border frictions. It also proposes a new method of estimating border cost from time-series data only, without relying on within-country variation. The estimate of border cost builds on nonlinearities in the real exchange rate process. The paper applies this method to the real exchange rate of final goods and a novel measure of the real exchange rate for productive capabilities. Relocation costs differ substantially between final goods and productive capabilities. During the years 1974–2008, a relocation reduces productive capability by 18% for the median country pair, whereas final goods by only 13%.

Date: 2011
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Working Paper: The Efficiency of the Global Markets for Final Goods and Productive Capabilities (2012)
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