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What Do We Know About Long-run Equilibrium Real Exchange Rates? PPPs vs Macroeconomic Approaches

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  • Romain Duval

Abstract

Despite the fact that the presence of non tradable goods is one of the most frequently advanced reasons for the failure of PPP, the empirical analysis conducted in this paper shows that it explains only a very small portion of the long run behaviour of real exchange rates (RERs) in developed countries: in most cases, there appears to be a very strong long run relationship between RERs calculated on price indexes for tradables and non tradables. As a consequence, deviations from PPP usually appear to be as large for both kinds of goods. To a certain extent, this stylised fact is also verified in the case of the yen/dollar RER, yet formerly known as a typical illustration of the so-called Balassa-Samuelson effect. In this context, so-called macroeconomic approaches of ERERs may be viewed as an alternative to all versions of PPP. We develop a model which combines the contributions of the most fruitful dynamic approaches, namely the NATREX and the BEER. An estimate of this model shows that the main long run determinants of the dollar/euro RER are the rate of consumption and the level of technical progress of the euro area relative to the US. Copyright Blackwell Publishers Ltd/University of Adelaide and Flinders University of South Australia 2002.

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  • Romain Duval, 2002. "What Do We Know About Long-run Equilibrium Real Exchange Rates? PPPs vs Macroeconomic Approaches," Australian Economic Papers, Wiley Blackwell, vol. 41(4), pages 382-403, December.
  • Handle: RePEc:bla:ausecp:v:41:y:2002:i:4:p:382-403
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    Cited by:

    1. Jerome L. Stein, 2004. "Optimal Debt and Equilibrium Exchange Rates in a Stochastic Environment: an Overview," CESifo Working Paper Series 1363, CESifo Group Munich.
    2. Belloc, Marianna & Federici, Daniela, 2010. "A two-country NATREX model for the euro/dollar," Journal of International Money and Finance, Elsevier, vol. 29(2), pages 315-335, March.
    3. Bal??zs ??gert & Kirsten Lommatzsch, 2004. "Equilibrium Exchange Rates in the Transition: The Tradable Price-Based Real Appreciation and Estimation Uncertainty," William Davidson Institute Working Papers Series 2004-676, William Davidson Institute at the University of Michigan.
    4. Reza Siregar, 2011. "The Concepts of Equilibrium Exchange Rate: A Survey of Literature," Staff Papers, South East Asian Central Banks (SEACEN) Research and Training Centre, number sp81, April.
    5. Chen, Xiaoshan & MacDonald, Ronald, 2014. "Measuring the Euro-Dollar Permanent Equilibrium Exchange Rate using the Unobserved Components Model," SIRE Discussion Papers 2015-05, Scottish Institute for Research in Economics (SIRE).
    6. Chen, Xiaoshan & MacDonald, Ronald, 2014. "Measuring the Euro-Dollar Permanent Equilibrium Exchange Rate using the Unobserved Components Model," 2007 Annual Meeting, July 29-August 1, 2007, Portland, Oregon TN 2015-05, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    7. Chen, Xiaoshan & MacDonald, Ronald, 2015. "Measuring the dollar–euro permanent equilibrium exchange rate using the unobserved components model," Journal of International Money and Finance, Elsevier, vol. 53(C), pages 20-35.

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