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Purchasing Power Parity and New Trade Theory

Author/Editor: MacDonald, Ronald | Ricci, Luca Antonio
Authorized for Distribution: February 1, 2002
Electronic Access: Free Full Text (PDF file size is 953KB)
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.

Summary: This paper theoretically derives and empirically tests the implications of a new trade theory framework for the systematic movements in the real exchange rate. It focuses on the effect of imperfect substitutability of tradables and on the importance of competitiveness, for which we construct an original proxy. Using a panel dynamic OLS estimation of nine bilateral US dollar real exchange rates, we derive long-run coefficients for relative productivity and competitiveness in 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. Our new measure of competitiveness is statistically significant in explaining deviations from PPP.
 
Series: Working Paper No. 02/32
Subject(s): Purchasing power parity | Exchange rates | Trade | Economic models
Author's keyword(s): New trade theory | real exchange rates | purchasing power parity | productivity differentials | the PPP puzzle
 
English  
    Published:   February 1, 2002        
    ISBN/ISSN:   1934-7073   Format:   Paper
    Stock No:   WPIEA0322002   Pages:   35
    Price:   US$15.00
       
     
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