A Short-Run Analysis of Exchange Rates and International Trade with an Application to Australia, New Zealand, and Japan

25 Pages Posted: 5 Apr 2014

See all articles by Jose Anson

Jose Anson

Universal Postal Union

Mauro Boffa

University of Geneva

Matthias Helble

Asian Development Bank; ADBI; ADBI

Date Written: April 3, 2014

Abstract

The information and communication technology (ICT) revolution of the past 3 decades has transformed the world into an integrated marketplace. Today, producers and consumers alike are able to compare the prices of local businesses and worldwide sellers. For an increasing number of tradable goods, they can take advantage of arbitrage opportunities between online and offline transactions. One of the key exogenous elements behind this arbitrage is exchange rate movements. The existing literature on exchange rates has concluded that nominal prices can be assumed to be rigid, which thus opens the door to short-term international arbitrage. However, empirical evidence of international short-term arbitrage has so far been lacking due to data constraints. In this paper, we first present a new dataset that holds records on daily international exchanges of goods, namely those sent through the international postal logistics network. We then combine this data set with daily data on international exchange rate movements to test the hypothesis of international arbitrage. Applying different econometric techniques, we show that in an environment of floating exchange rates, almost instantaneous short-term international arbitrage is indeed occurring and that it has a persistent effect. The effect seems to be particularly pronounced in the developed countries of Asia and the Pacific.

Keywords: price stickiness, international arbitrage, international trade, exchange rates

JEL Classification: F14, F31

Suggested Citation

Anson, Jose and Boffa, Mauro and Helble, Matthias, A Short-Run Analysis of Exchange Rates and International Trade with an Application to Australia, New Zealand, and Japan (April 3, 2014). ADBI Working Paper 471, Available at SSRN: https://ssrn.com/abstract=2419984 or http://dx.doi.org/10.2139/ssrn.2419984

Jose Anson (Contact Author)

Universal Postal Union ( email )

Case postale 312
3000 BERNE 15
Switzerland

Mauro Boffa

University of Geneva ( email )

102 Bd Carl-Vogt
Genève, CH - 1205
Switzerland

Matthias Helble

Asian Development Bank ( email )

Philippines
006326831120 (Phone)

ADBI ( email )

Kasumigaseki Building 8F
3-2-5, Kasumigaseki, Chiyoda-ku
Tokyo, 100-6008
Japan

ADBI ( email )

Kasumigaseki Building 8F
3-2-5, Kasumigaseki, Chiyoda-ku
Tokyo, 100-6008
Japan

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