Working Paper: NBER ID: w7408
Authors: Yinwong Cheung; Menzie D. Chinn; Eiji Fujii
Abstract: We examine the relationship between market structure and the persistence of U.S. dollar-based sectoral real exchange rates for fourteen OECD countries. Our empirical results based on disaggregated data suggest that differences in market structure significantly determine the rates at which deviations from sectoral purchasing power parity decay. Specifically, industries with a larger price-cost margin are found to exhibit slower parity reversion of their sectoral real exchange rates. Further, as the degree of intra-industry trade activity increases, sectoral real exchange rate persistence becomes more pronounced. These findings imply that an imperfectly competitive market structure contributes to the well-documented persistence in real exchange rates.
Keywords: No keywords provided
JEL Codes: F31; F40; L16
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Differences in market structure (D49) | Persistence of sectoral real exchange rates (F31) |
| Larger price-cost margins (L11) | Slower reversion to purchasing power parity (F31) |
| Intra-industry trade activity increases (F12) | More pronounced persistence of sectoral real exchange rates (F31) |