The Efficiency of the Global Market for Capital Goods

Despite integration of financial and goods markets, borders still impose considerable friction to flows of goods. In this paper we compare the efficiency of the global market of commodities with the market for capital goods. We construct a novel measure of the real exchange rate based on capital goods and estimate the costs of moving goods across borders directly from time series properties of the real exchange rate process. This process is derived from a continuous time stochastic general equilibrium model, which has not previously been estimated. We estimate this model by indirect inference, employing a two-regime autoregressive model (ESTAR) as auxiliary model.

For the period 1974 to 2007 estimated relocation cost among 18 developed countries range from 15% to 55% for capital goods, and from 10% to 25% for commodities. Border frictions in markets for capital goods are thus substantially higher than in markets for commodities. For commodities as well as for capital goods, relocation costs are found to be smallest between country pairs where one country is economically much larger than the other, and between countries which are culturally or geographically related. Relocation costs for capital goods vary widely across country pairs; especially within Continental Europe they are disproportionately large.

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