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Real Exchange Rates over a Century: The Case of the Drachma/Sterling Rate, 1833-1939

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Author Info
Dimitrios Sideris () (Bank of Greece and University of Ioannina)
Abstract

Recent studies on real exchange rates advocate the use of long samples in order to reveal the low frequency properties of the processes. The present paper contributes to this strand of the literature by exploiting recently released time series for the drachma/sterling rate for the period 1833-1939. This is an interesting period as it covers different exchange rate regimes and the effects of important historical events. In the paper, the mean-reverting behaviour of the real drachma/sterling exchange rate is initially examined applying univariate unit root tests and then the validity of Purchasing Power Parity (PPP) is tested using cointegration analysis. The results provide support for a weak PPP relationship, which turns out to be robust across different sub-periods characterised by different exchange rate regimes. Adjustment to PPP is reached at a relatively high speed and occurs via movements of the nominal exchange rate.

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File URL: http://www.bankofgreece.gr/BogEkdoseis/Paper200866.pdf
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Publisher Info
Paper provided by Bank of Greece in its series Working Papers with number 66.

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Length: 23 pages
Date of creation: Jan 2008
Date of revision:
Handle: RePEc:bog:wpaper:66

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Web page: http://www.bankofgreece.gr
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Related research
Keywords: real exchange rates; cointegration; PPP;

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Find related papers by JEL classification:
F31 - International Economics - - International Finance - - - Foreign Exchange
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions
N23 - Economic History - - Financial Markets and Institutions - - - Europe: Pre-1913
N24 - Economic History - - Financial Markets and Institutions - - - Europe: 1913-

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References listed on IDEAS
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  1. Alan M. Taylor & Mark P. Taylor, 2004. "The Purchasing Power Parity Debate," Journal of Economic Perspectives, American Economic Association, vol. 18(4), pages 135-158, Fall. [Downloadable!] (restricted)
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  2. Diebold, Francis X & Husted, Steven & Rush, Mark, 1991. "Real Exchange Rates under the Gold Standard," Journal of Political Economy, University of Chicago Press, vol. 99(6), pages 1252-71, December. [Downloadable!] (restricted)
    Other versions:
  3. Sideris, Dimitrios, 2000. "Dealing with Methodological Problems when Testing for Purchasing Power Parity: Evidence from Greece," Economia Internazionale / International Economics, Camera di Commercio di Genova, vol. 53(3), pages 389-407.
  4. Mohammad S. Hasan, 2006. "A century of Purchasing Power Parity: evidence from Canada and Australia," Applied Financial Economics, Taylor and Francis Journals, vol. 16(1-2), pages 145-156, January. [Downloadable!] (restricted)
  5. Mark P. Taylor, 2006. "Real exchange rates and Purchasing Power Parity: mean-reversion in economic thought," Applied Financial Economics, Taylor and Francis Journals, vol. 16(1-2), pages 1-17, January. [Downloadable!] (restricted)
  6. John Y. Campbell & Pierre Perron, 1991. "Pitfalls and Opportunities: What Macroeconomists Should Know About Unit Roots," NBER Technical Working Papers 0100, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. Abuaf, Niso & Jorion, Philippe, 1990. " Purchasing Power Parity in the Long Run," Journal of Finance, American Finance Association, vol. 45(1), pages 157-74, March. [Downloadable!] (restricted)
  8. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June. [Downloadable!] (restricted)
  9. Juselius, Katarina, 1995. "Do purchasing power parity and uncovered interest rate parity hold in the long run? An example of likelihood inference in a multivariate time-series model," Journal of Econometrics, Elsevier, vol. 69(1), pages 211-240, September. [Downloadable!] (restricted)
  10. Elliott, Graham & Rothenberg, Thomas J & Stock, James H, 1996. "Efficient Tests for an Autoregressive Unit Root," Econometrica, Econometric Society, vol. 64(4), pages 813-36, July. [Downloadable!] (restricted)
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  11. Serena Ng & Pierre Perron, 2001. "LAG Length Selection and the Construction of Unit Root Tests with Good Size and Power," Econometrica, Econometric Society, vol. 69(6), pages 1519-1554, November. [Downloadable!] (restricted)
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  12. Alan M. Taylor, 2002. "A Century Of Purchasing-Power Parity," The Review of Economics and Statistics, MIT Press, vol. 84(1), pages 139-150, February. [Downloadable!] (restricted)
    Other versions:
  13. Alves, Denisard C O & Cati, Regina Celia & Fava, Vera Lucia, 2001. "Purchasing Power Parity in Brazil: A Test for Fractional Cointegration," Applied Economics, Taylor and Francis Journals, vol. 33(9), pages 1175-85, July. [Downloadable!] (restricted)
  14. Costa, Antonio A & Crato, Nuno, 2001. "Long-Run versus Short-Run Behaviour of the Real Exchange Rates," Applied Economics, Taylor and Francis Journals, vol. 33(5), pages 683-88, April. [Downloadable!] (restricted)
  15. Hakkio, Craig S. & Rush, Mark, 1991. "Cointegration: how short is the long run?," Journal of International Money and Finance, Elsevier, vol. 10(4), pages 571-581, December. [Downloadable!] (restricted)
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  16. Brissimis, Sophocles N. & Sideris, Dimitris A. & Voumvaki, Fragiska K., 2005. "Testing long-run purchasing power parity under exchange rate targeting," Journal of International Money and Finance, Elsevier, vol. 24(6), pages 959-981, October. [Downloadable!] (restricted)
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  17. Froot, Kenneth A. & Rogoff, Kenneth, 1995. "Perspectives on PPP and long-run real exchange rates," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 32, pages 1647-1688 Elsevier. [Downloadable!] (restricted)
  18. Peel, David & Sarno, Lucio & Taylor, Mark P, 2001. "Nonlinear Mean-Reversion in Real Exchange Rates: Towards a Solution to the Purchasing Power Parity Puzzles," CEPR Discussion Papers 2658, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  19. Papell, David H., 1997. "Searching for stationarity: Purchasing power parity under the current float," Journal of International Economics, Elsevier, vol. 43(3-4), pages 313-332, November. [Downloadable!] (restricted)
  20. Peter Pedroni, 2001. "Purchasing Power Parity Tests In Cointegrated Panels," The Review of Economics and Statistics, MIT Press, vol. 83(4), pages 727-731, November. [Downloadable!] (restricted)
  21. Lothian, James R & Taylor, Mark P, 1996. "Real Exchange Rate Behavior: The Recent Float from the Perspective of the Past Two Centuries," Journal of Political Economy, University of Chicago Press, vol. 104(3), pages 488-509, June. [Downloadable!] (restricted)
  22. Jomana Amara & David H. Papell, 2006. "Testing for Purchasing Power Parity using stationary covariates," Applied Financial Economics, Taylor and Francis Journals, vol. 16(1-2), pages 29-39, January. [Downloadable!] (restricted)
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