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Deviations of Exchange Rates from Purchasing Power Parity: A Story Featuring Two Monetary Unions

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  • Bayoumi, Tamim
  • MacDonald, Ronald

Abstract

We examine the mean-reverting properties of real exchange rates, by comparing the unit root properties of a group of international real exchange rates with two groups of intra-national real exchange rates. Strikingly, we find that while the international real rates taken as a group are mean-reverting, the intra-national rates are not. This is consistent with the view that while monetary shocks may be mean-reverting over the medium-term, underlying real factors do generate long-term trends in real exchange rates.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 1932.

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Date of creation: Jul 1998
Date of revision:
Handle: RePEc:cpr:ceprdp:1932

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Keywords: Exchange Rates; stationarity;

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Cited by:
  1. Anindya Banerjee & Massimiliano Marcellino & Chiara Osbat, 2005. "Testing for PPP: Should we use panel methods?," Empirical Economics, Springer, vol. 30(1), pages 77-91, January.
  2. Catherine S. F. Ho & M. Ariff, 2008. "The Role of Non-Parity Fundamentals in Exchange Rate Determination: Australia and the Asia Pacific Region," CARF F-Series CARF-F-125, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
  3. António Portugal Duarte, 2005. "Purchasing power parity: an empirical study of three EMU countries," International Trade 0505005, EconWPA.
  4. Ho, Catherine S.F. & Ariff, M., 2012. "Time to equilibrium in exchange rates: G-10 and Eastern European economies," Global Finance Journal, Elsevier, vol. 23(2), pages 94-107.
  5. Christoph Fischer, 2006. "PPP: a disaggregated view," Applied Financial Economics, Taylor & Francis Journals, vol. 16(1-2), pages 93-108.
  6. Enrique Alberola, 2005. "Misalignment, Liabilities Dollarization And Exchange Rate Adjustment In Latin America," International Finance 0507005, EconWPA.
  7. Dimitrios Sideris, 2004. "Testing for Long-Run PPP in a System Context: Evidence for the US, Germany and Japan," Working Papers 19, Bank of Greece.
  8. Catherine Ho & M. Ariff, 2011. "Sticky prices and time to equilibrium: evidence from Asia-Pacific trade-related economies," Applied Economics, Taylor & Francis Journals, vol. 43(21), pages 2851-2861.
  9. Yihui Lan, 2001. "The Explosion of Purchasing Power Parity," Economics Discussion / Working Papers 01-22, The University of Western Australia, Department of Economics.
  10. Gligor Bishev, 1999. "Monetary Policy and Transition in Southeast Europe," wiiw Balkan Observatory Working Papers 002, The Vienna Institute for International Economic Studies, wiiw.
  11. Catherine S. F. Ho & M. Ariff, 2009. "A Test of Purchasing Power Parity: Asia Pacific and Latin America," Asian Academy of Management Journal of Accounting and Finance, Penerbit Universiti Sains Malaysia, vol. 5(2), pages 33-53.
  12. 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.
  13. Alba, Joseph D. & Park, Donghyun, 2003. "Purchasing Power Parity in Developing Countries: Multi-Period Evidence Under the Current Float," World Development, Elsevier, vol. 31(12), pages 2049-2060, December.
  14. Enrique Alberola & Humberto López & Luis Servén, 2004. "Tango with the gringo: the hard peg and real misalign ment in Argentina," Banco de Espa�a Working Papers 0405, Banco de Espa�a.
  15. Enrique Alberola & Susana G. Cervero & Humberto Lopez & Angel Ubide, 2000. "Global Equilibrium Exchange Rates: Euro, Dollar, "Ins," "Outs," and Other Major Currencies in a Panel Cointegration Framework," Econometric Society World Congress 2000 Contributed Papers 0051, Econometric Society.
  16. Enrique Alberola & Daniel Navia, 2007. "Equilibrium exchange rates in the new EU members: external imbalances vs. real convergence," Banco de Espa�a Working Papers 0708, Banco de Espa�a.
  17. Gligor Bishev, 1999. "Monetary Policy and Transition in Sotheast Europe," Working Papers 1999-02, National Bank of the Republic of Macedonia.

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