The Efficiency of the Global Markets for Final Goods and Productive Capabilities

Despite integration of financial and goods markets, borders still impose considerable friction on the flow of goods. This paper shows that a decline in output shock variance might increase the time of mean reversion despite declining border frictions. We estimate these frictions and determinants of mean reversion using a novel measure of the real exchange rate for productive capabilities. Our estimate of border cost builds on nonlinearities in the real exchange rate process. We find large cost differences between relocating final goods and productive capabilities. During the years 1974–2008, a relocation reduces productive capability by 18% for the median country pair, whereas final goods by only 13%.