Real exchange rates, imperfect substitutability, and imperfect competition

Macdonald, R. and Ricci, L.A. (2007) Real exchange rates, imperfect substitutability, and imperfect competition. Journal of Macroeconomics, 29(4), pp. 639-664. (doi: 10.1016/j.jmacro.2005.11.007)

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This paper theoretically derives and empirically tests the implications of a trade theory framework with imperfect substitution of tradables for the systematic movements in the real exchange rate. Using a panel DOLS estimator, we derive long-run coefficients for relative productivity and product market competition (for which we construct an original proxy) in both the tradable and non-tradable sectors, controlling for standard macroeconomic variables. The implications of imperfect substitutability of tradables fit the data better than the standard neoclassical assumption of price equalization, and our new measure of product market competition is a statistically significant determinant of the real exchange rate.

Item Type:Articles
Glasgow Author(s) Enlighten ID:MacDonald, Professor Ronald
Authors: Macdonald, R., and Ricci, L.A.
College/School:College of Social Sciences > Adam Smith Business School > Economics
Journal Name:Journal of Macroeconomics
Publisher:Elsevier B.V.
ISSN (Online):1873-152X
Published Online:03 April 2007

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