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Systematic Movements in Real Exchange Rates in the G-5: Evidence on theIntegration of Internal and External Markets

  • Richard C. Marston
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    Many recent studies have documented the random behavior of real exchange rates. This paper shows that real exchange rates defined for different sectors of an economy move closely together with one another even though each of the sectoral real exchange rates taken alone has a large random component. The sectoral real exchange rates are tied together by internal price links due to factor mobility within each national economy. Any differences between real exchange rates which develop, moreover, can be explained almost entirely by productivity differentials, at least in the long run. This paper contrasts the strong ties which bind together prices from different sectors internally with ties that bind the prices of goods from the same sector internationally. Prices are shown to be much more highly correlated internally than externally because flexible exchange rates disrupt normal pricing relationships between goods from different countries.

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    File URL: http://www.nber.org/papers/w3332.pdf
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    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3332.

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    Date of creation: Apr 1990
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    Publication status: published as Journal of Banking and Finance, Vol. 14, November 1990, pp. 1023-1044
    Handle: RePEc:nbr:nberwo:3332
    Note: ITI IFM
    Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
    Phone: 617-868-3900
    Web page: http://www.nber.orgEmail:


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    1. Hsieh, David A., 1982. "The determination of the real exchange rate : The productivity approach," Journal of International Economics, Elsevier, vol. 12(3-4), pages 355-362, May.
    2. Abuaf, Niso & Jorion, Philippe, 1990. " Purchasing Power Parity in the Long Run," Journal of Finance, American Finance Association, vol. 45(1), pages 157-74, March.
    3. Richard C. Marston & Stephen J. Turnovsky, 1983. "Imported Materials Prices, Wage Policy, and Macroeconomic Stabilization," NBER Working Papers 1254, National Bureau of Economic Research, Inc.
    4. Adler, Michael & Lehmann, Bruce, 1983. " Deviations from Purchasing Power Parity in the Long Run," Journal of Finance, American Finance Association, vol. 38(5), pages 1471-87, December.
    5. Jeffrey A. Frankel, 1985. "International Capital Mobility and Crowding Out in the U.S. Economy: Imperfect Integration of Financial Markets or of Goods Markets?," NBER Working Papers 1773, National Bureau of Economic Research, Inc.
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