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Co-movements in international dollar price levels

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  • Shelley, Gary
  • Wallace, Frederick

Abstract

This paper studies the relation between movements in the U.S. price level and the dollar price levels of nineteen other countries. Using the band pass filter developed by Christiano and Fitzgerald (2003), we examine correlations between dollar prices when decomposed into their high, medium, and low frequency cycles. The low frequency cycle in the U.S. price series is highly correlated with low frequency cycles in dollar price levels of the majority of countries in our sample. The high correlation between low frequency cycles persists over a variety of historical sub-periods, including the eras of fixed and flexible nominal exchange rates. This result, suggesting the existence of a common long-run price cycle, is consistent with long-run purchasing power parity. In contrast, both high and medium frequency cycles are more highly correlated prior to the Great Depression. This result is consistent with studies finding greater stability of real exchange rates during the era of the gold standard. Also, it appears that the increased volatility of U.S. real exchange rates after the 1973 move to flexible exchange rates was largely due to declines in the co-movement of short-run dollar price cycles.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 4133.

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Date of creation: Jul 2007
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Handle: RePEc:pra:mprapa:4133

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Keywords: Purchasing power parity; real exchange rate volatility; band-pass filter;

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  1. Alba, Joseph D. & Papell, David H., 2007. "Purchasing power parity and country characteristics: Evidence from panel data tests," Journal of Development Economics, Elsevier, vol. 83(1), pages 240-251, May.
  2. Kool, C. J. M. & Koedijk, K. G., 1997. "Real exchange rates between the wars," Journal of International Money and Finance, Elsevier, vol. 16(2), pages 211-232, April.
  3. Robert J. Hodrick & Edward Prescott, 1981. "Post-War U.S. Business Cycles: An Empirical Investigation," Discussion Papers 451, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  4. Neumann, Manfred, 1995. "Real effects of exchange rate volatility," Journal of International Money and Finance, Elsevier, vol. 14(3), pages 417-426, June.
  5. Gonzaga, Gustavo M. & Terra, Maria Cristina T., 1997. "Equilibrium real exchange rate, volatility, and stabilization," Journal of Development Economics, Elsevier, vol. 54(1), pages 77-100, October.
  6. Frederick H. Wallace & Gary L. Shelley, 2005. "An Alternative Test of Purchasing Power Parity," International Finance 0502009, EconWPA.
  7. Hausmann, Ricardo & Panizza, Ugo & Rigobon, Roberto, 2006. "The long-run volatility puzzle of the real exchange rate," Journal of International Money and Finance, Elsevier, vol. 25(1), pages 93-124, February.
  8. Lawrence J. Christiano & Terry J. Fitzgerald, 1999. "The Band pass filter," Working Paper 9906, Federal Reserve Bank of Cleveland.
    • Lawrence J. Christiano & Terry J. Fitzgerald, 2003. "The Band Pass Filter," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(2), pages 435-465, 05.
  9. 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.
  10. Mussa, Michael, 1986. "Nominal exchange rate regimes and the behavior of real exchange rates: Evidence and implications," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 25(1), pages 117-214, January.
  11. Lothian, James R., 1998. "Some new stylized facts of floating exchange rates," Journal of International Money and Finance, Elsevier, vol. 17(1), pages 29-39, February.
  12. Natalia Chernyshoff & David S. Jacks & Alan M. Taylor, 2005. "Stuck on Gold: Real Exchange Rate Volatility and the Rise and Fall of the Gold Standard," NBER Working Papers 11795, National Bureau of Economic Research, Inc.
  13. Lee, Kiseok & Ni, Shawn, 1997. "An Empirical Analysis of the Output Effects of Temporary and Persistent Government Purchases," Journal of Macroeconomics, Elsevier, vol. 19(4), pages 717-730, October.
  14. Mark P. Taylor, 1995. "The Economics of Exchange Rates," Journal of Economic Literature, American Economic Association, vol. 33(1), pages 13-47, March.
  15. Robertson, Raymond, 2004. "Relative prices and wage inequality: evidence from Mexico," Journal of International Economics, Elsevier, vol. 64(2), pages 387-409, December.
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