Elasticity of Substitution and the Persistence of the Deviation of the Real Exchange Rates

Stephen J Turnovsky and Akm Morshed

No 39, Computing in Economics and Finance 2005 from Society for Computational Economics

Abstract: Empirical evidence suggests (i) that the real exchange rates of developing economies show less persistence than do those of more advanced economies and (ii) that the elasticity of substitution between capital and labor tends to increase from below unity for less developed economies to above one for more advanced economies. This paper shows how the introduction of sectoral adjustment costs in a two-sector model of a small open economy, together with CES production functions, provides a very natural explanation of this empirical regularity. Other aspects of the relationship between the technologies and the speed of convergence of the real exchange rate are also discussed.

Keywords: Real Exchange Rate; Elasticity of Substitution; Adjustment Costs (search for similar items in EconPapers)
JEL-codes: F41 O11 O41 (search for similar items in EconPapers)
Date: 2005-11-11
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Journal Article: Elasticity of Substitution and the Persistence of the Deviation of the Real Exchange Rates (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:sce:scecf5:39

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