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Purchasing Power Parity and the Real Exchange Rate

  • Sarno, Lucio
  • Taylor, Mark P

We assess the progress made by the profession in understanding real exchange rate behaviour, through a selective and critical but nonetheless expository review of the literature. Our reading of the literature leads us to the main conclusions that purchasing power parity might be viewed as a valid long-run international parity condition when applied to bilateral exchange rates among major industrialized countries and that also means reversion in real exchange rates displays significant non-linearities. Further work investigating the effects of real shocks on the long-run equilibrium level also seems warranted.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2913.

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Date of creation: Aug 2001
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Handle: RePEc:cpr:ceprdp:2913
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