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Finance and Financial Management
Costs of goods transportation; economies of scale; real exchange rate; purchasing power parity; nonlinearity.
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A Dynamic Equilibrium Model Of Real Exchange Rates With General Transaction Costs, Gautam Goswami, Milind Shrikhande, Liuren Wu
A Dynamic Equilibrium Model Of Real Exchange Rates With General Transaction Costs, Gautam Goswami, Milind Shrikhande, Liuren Wu
CRIF Working Paper series
We study the behavior of real exchange rates in a two-country dynamic equilibrium model. In this model, consumers can only consume domestic goods but can invest costlessly in capital stocks of both countries. Nevertheless, transporting goods between the two countries is costly and, hence, the rebalancing of the capital stock can only happen finitely often. We propose a realistic cost structure for goods transportation, wherein the total cost increases with the amount of shipment but the unit cost decreases with it due to economies of scale. Given such a cost structure, the optimal decisions on when and how much to …