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

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  • Hilde Christiane Bjørnland
  • Håvard Hungnes

    () (Statistics Norway)

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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Bibliographic Info

Paper provided by Research Department of Statistics Norway in its series Discussion Papers with number 326.

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Date of creation: Aug 2002
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Handle: RePEc:ssb:dispap:326

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Keywords: Purchasing power parity; uncovered interest parity; cointegration VAR.;

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Citations

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Cited by:
  1. Håvard Hungnes & Hilde C. Bj�rnland, 2006. "The importance of interest rates for forecasting the exchange rate," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 25(3), pages 209-221.
  2. Hilde C. Bjørnland & Håvard Hungnes, 2005. "The commodity currency puzzle," Discussion Papers 423, Research Department of Statistics Norway.
  3. 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.
  4. 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.
  5. Kornélia Krajnyák & Volodymyr Tulin, 2010. "How Expensive is Norway? New International Relative Price Measures," IMF Working Papers 10/133, International Monetary Fund.

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