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Article
Non-linear adjustment in law of one price and physical characteristics of goods
Review of International Economics (2009)
  • Martin Berka
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 aggregation of heterogeneous components (”aggregation bias” of Imbs, et al. 2005).

Keywords
  • real exchange rate,
  • non-linearity,
  • arbitrage,
  • weight,
  • volume
Disciplines
Publication Date
February, 2009
Citation Information
Martin Berka. "Non-linear adjustment in law of one price and physical characteristics of goods" Review of International Economics Vol. 17 Iss. 1 (2009)
Available at: http://works.bepress.com/martin_berka/2/