Equilibrium models of real exchange rate determination in the presence of transactions costs imply a nonlinear adjustment process toward purchasing power parity (PPP). Conventional cointegration tests, which ignore the effect of transactions costs, may be biased against the long-run PPP...

Information costs and regulatory barriers are the main distinguishing features of international financial markets as compared to national financial markets. This paper presents a simple model of the impact of these factors on banks' cross-border activities and provides empirical evidence. Our...