REAL EXCHANGE-RATES AND THE PATTERN OF TRADE - COMPARATIVE DYNAMICS FOR NORTH AND SOUTH

Using a two-country model of imperfect competition, this paper examine s cross-sectional implications for the time-series behavior of real ex change rates across different patterns of trade. Under intersectoral t rade, price-setters display less interaction in their pricing decision s across national boundaries, allowing for greater deviation and weake r mean-reversion in relative prices. Conversely, with intra-industry t rade, greater price linkages between similar countries trading in simi lar goods generate lower pass-through and less real exchange-rate pers istence. The pattern of trade is shown to essentially alter the degree of domestic price-stickiness, which in turn affects the self-correcti ng mechanism of an open economy. Copyright (C) 1996 Elsevier Science L td.