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Real Exchange Rate Persistence in US Dollar PPP Systems

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  • William J. Crowder

Abstract

type="main" xml:lang="en"> Persistent deviations of exchange rates from equilibrium values may lead to inefficient resource allocations internationally. Such persistence is well documented and represents a challenge for policy makers. If the source of the persistent deviations is real then effective policy interventions are limited. However, effective policy responses are possible when deviations are caused by nominal or market-structure shocks. The appropriate policy response depends on the cause of the disequilibrium. In this study I use a structural vector autoregression to identify the shocks responsible for purchasing power parity (PPP) deviations for 12 US dollar exchange rates. I find that aggregate demand shocks are not the primary cause of PPP deviations. Real shocks and foreign exchange shocks are much more important. Foreign exchange shocks dominate exchange rate behaviour. This suggests a policy response with greater focus on the foreign exchange market and the degree to which persistent PPP deviations represent compensation for risk-bearing or a form of micro-structure inefficiency.

Suggested Citation

  • William J. Crowder, 2014. "Real Exchange Rate Persistence in US Dollar PPP Systems," International Finance, Wiley Blackwell, vol. 17(2), pages 209-240, June.
    • Handle: RePEc:bla:intfin:v:17:y:2014:i:2:p:209-240
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    Cited by:

    1. Andre Varella Mollick, 2016. "Adoption of the Gold Standard and Real Exchange Rates in the Core and Periphery, 1870–1913," International Finance, Wiley Blackwell, vol. 19(1), pages 89-107, April.
    2. Chen, Shiu-Sheng & Chou, Yu-Hsi, 2015. "Revisiting the relationship between exchange rates and fundamentals," Journal of Macroeconomics, Elsevier, vol. 46(C), pages 1-22.
    3. Wen-Yi Chen & Tsangyao Chang & Yu-Hui Lin, 2018. "Investigating the Persistence of Suicide in the United States: Evidence from the Quantile Unit Root Test," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 135(2), pages 813-833, January.
    4. Chou, Yu-Hsi, 2018. "Understanding the sources of the exchange rate disconnect puzzle: A variance decomposition approach," International Review of Economics & Finance, Elsevier, vol. 56(C), pages 267-287.

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