Co-movements in international dollar price levels
AbstractThis 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 InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 4133.
Date of creation: Jul 2007
Date of revision:
Purchasing power parity; real exchange rate volatility; band-pass filter;
Find related papers by JEL classification:
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
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