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Fundamental determinants of the long run real exchange rate: The case of Norway

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Abstract

Modelling the Norwegian exchange rate against a basket of currencies, we find a robust long-term link between the real exchange rate and real interest differential that is consistent with purchasing power parity (PPP) and uncovered interest parity (UIP). However, PPP alone is rejected. These findings are confirmed focusing on the Norwegian bilateral exchange rate with Germany and (possibly) Sweden, but rejected against the UK and the US. We argue that rejection of bilateral relationships may result from idiosyncratic shocks in the different countries that may be negligible when modelling against a basket of currencies.

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File URL: http://www.sv.uio.no/econ/english/research/unpublished-works/working-papers/pdf-files/2002/Memo-23-2002.pdf
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Bibliographic Info

Paper provided by Oslo University, Department of Economics in its series Memorandum with number 23/2002.

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Length: 38 pages
Date of creation: 18 Jun 2003
Date of revision:
Handle: RePEc:hhs:osloec:2002_023

Contact details of provider:
Postal: Department of Economics, University of Oslo, P.O Box 1095 Blindern, N-0317 Oslo, Norway
Phone: 22 85 51 27
Fax: 22 85 50 35
Email:
Web page: http://www.oekonomi.uio.no/indexe.html
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Keywords: Purchasing power parity; uncovered interest parity; cointegration VAR;

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References

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Cited by:
  1. Hilde C. Bjørnland & Håvard Hungnes, 2005. "The commodity currency puzzle," Discussion Papers 423, Research Department of Statistics Norway.
  2. Hilde C. Bjørnland & Håvard Hungnes, 2003. "The importance of interest rates for forecasting the exchange rate," Discussion Papers 340, Research Department of Statistics Norway.
  3. Abdalrahman AbuDalu & Elsadig Musa Ahmed, 2013. "The long and short run forcing variables of purchasing power parity of ASEAN-5," E3 Journal of Business Management and Economics., E3 Journals, vol. 4(3), pages 066-081.
  4. Alexeeva-Talebi, Victoria, 2010. "Cost pass-through in strategic oligopoly: Sectoral evidence for the EU ETS," ZEW Discussion Papers 10-056, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  5. Kornélia Krajnyák & Volodymyr Tulin, 2010. "How Expensive is Norway? New International Relative Price Measures," IMF Working Papers 10/133, International Monetary Fund.
  6. Hilde Bjørnland, 2004. "The Role of the Exchange Rate as a Shock Absorber in a Small Open Economy," Open Economies Review, Springer, vol. 15(1), pages 23-43, January.

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