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. It also proposes a new method of estimating border cost from time-series data only, without relying on within-country variation. The estimate of border cost builds on nonlinearities in the real exchange rate process. The paper applies this method to the real exchange rate of final goods and a novel measure of the real exchange rate for productive capabilities. Relocation costs differ substantially between 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%.