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Deviations of Exchange Rates from Purchasing Power Parity; A Story Featuring Two Monetary Unions

Author

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  • Ronald MacDonald
  • Tamim Bayoumi

Abstract

We examine the mean-reverting properties of real exchange rates, by comparing the unit root properties of a group of international real exchange rates with two groups of intra-national real exchange rates. Strikingly, we find that while the international real rates taken as a group appear mean-reverting, the intra-national rates are not. This is consistent with the view that while monetary shocks may be mean-reverting over the medium term, underlying real factors do generate long-term trends in real exchange rates.

Suggested Citation

  • Ronald MacDonald & Tamim Bayoumi, 1998. "Deviations of Exchange Rates from Purchasing Power Parity; A Story Featuring Two Monetary Unions," IMF Working Papers 98/69, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:98/69
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    Cited by:

    1. Sideris, Dimitrios, 2006. "Testing for long-run PPP in a system context: Evidence for the US, Germany and Japan," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 16(2), pages 143-154, April.
    2. Enrique Alberola, 2003. "Misalignment, liabilities dollarization and exchange rate adjustment in Latin America," Working Papers 0309, Banco de España;Working Papers Homepage.
    3. Alberola, Enrique & Lopez, Humberto & Serven, Luis, 2004. "Tango with the Gringo: the hard peg and real misalignment in Argentina," Policy Research Working Paper Series 3322, The World Bank.
    4. Jan Marc Berk & Job Swank, 2007. "Regional real exchange rates and Phillips curves in monetary unions - Evidence from the US and EMU," DNB Working Papers 147, Netherlands Central Bank, Research Department.
    5. Gligor Bishev, 1999. "Monetary Policy and Transition in Sotheast Europe," Working Papers 1999-02, National Bank of the Republic of Macedonia.
    6. Brissimis, Sophocles N. & Sideris, Dimitris A. & Voumvaki, Fragiska K., 2005. "Testing long-run purchasing power parity under exchange rate targeting," Journal of International Money and Finance, Elsevier, vol. 24(6), pages 959-981, October.
    7. Ronald MacDonald, 2000. "The role of the exchange rate in economic growth: a euro-zone perspective," Working Paper Research 09, National Bank of Belgium.
    8. Catherine Ho & M. Ariff, 2011. "Sticky prices and time to equilibrium: evidence from Asia-Pacific trade-related economies," Applied Economics, Taylor & Francis Journals, vol. 43(21), pages 2851-2861.
    9. Anindya Banerjee & Massimiliano Marcellino & Chiara Osbat, 2005. "Testing for PPP: Should we use panel methods?," Empirical Economics, Springer, vol. 30(1), pages 77-91, January.
    10. António Portugal Duarte, 2005. "Purchasing power parity: an empirical study of three EMU countries," International Finance 0505010, EconWPA.
    11. David Laidler & William B.P. Robson, 2004. "Two Percent Target: The Context, Theory, and Practice of Canadian Monetary Policy since 1991," C.D. Howe Institute Policy Studies, C.D. Howe Institute, number 20041, January.
    12. Christoph Fischer, 2006. "PPP: a disaggregated view," Applied Financial Economics, Taylor & Francis Journals, vol. 16(1-2), pages 93-108.
    13. Alba, Joseph D. & Park, Donghyun, 2003. "Purchasing Power Parity in Developing Countries: Multi-Period Evidence Under the Current Float," World Development, Elsevier, vol. 31(12), pages 2049-2060, December.
    14. Enrique Alberola & Daniel Navia, 2007. "Equilibrium exchange rates in the new EU members: external imbalances vs. real convergence," Working Papers 0708, Banco de España;Working Papers Homepage.
    15. Catherine S. F. Ho & M. Ariff, 2009. "A Test of Purchasing Power Parity: Asia Pacific and Latin America," Asian Academy of Management Journal of Accounting and Finance (AAMJAF), Penerbit Universiti Sains Malaysia, vol. 5(2), pages 33-53.
    16. Yihui Lan, 2001. "The Explosion of Purchasing Power Parity," Economics Discussion / Working Papers 01-22, The University of Western Australia, Department of Economics.
    17. Susana Garcia Cervero & J. Humberto Lopez & Enrique Alberola Ila & Angel J. Ubide, 1999. "Global Equilibrium Exchange Rates; Euro, Dollar, “Ins,” “Outs,” and Other Major Currencies in a Panel Cointegration Framework," IMF Working Papers 99/175, International Monetary Fund.
    18. Ho, Catherine S.F. & Ariff, M., 2012. "Time to equilibrium in exchange rates: G-10 and Eastern European economies," Global Finance Journal, Elsevier, vol. 23(2), pages 94-107.
    19. Catherine S. F. Ho & M. Ariff, 2008. "The Role of Non-Parity Fundamentals in Exchange Rate Determination: Australia and the Asia Pacific Region," CARF F-Series CARF-F-125, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    20. Gligor Bishev, 1999. "Monetary Policy and Transition in Southeast Europe," wiiw Balkan Observatory Working Papers 2, The Vienna Institute for International Economic Studies, wiiw.

    More about this item

    Keywords

    Monetary unions; Exchange rates; stationarity; real exchange rates; exchange rate; real exchange rate; international financial;

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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