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Currency Union and Real Exchange Rate Behavior

Author

Listed:
  • James R. Lothian

    (Fordham University)

  • Cornelia H. McCarthy

    (Fordham University)

Abstract

In this paper we study the behavior of the real exchange rate of three North American currencies vis-a-vis the U.S. dollar: the Canadian dollar the Mexican peso, and the Panamanian Balboa. Our principal object is to design an experiment in which meaningful comparisons of behavior across regimes would be possible. In the main we were unable to find any. The allegation of problems created due to aggregating data across regimes therefore receives no support at all in these data. A second criterion for choosing the countries in our sample was differences in level of economic development. The object here was to provide ample leeway for real variables to operate. For Mexico such factors do not appear to matter. For Panama they might be of some importance, but a modified form of PPP nevertheless continues to perform well.

Suggested Citation

  • James R. Lothian & Cornelia H. McCarthy, 2003. "Currency Union and Real Exchange Rate Behavior," International Finance 0311008, EconWPA.
  • Handle: RePEc:wpa:wuwpif:0311008
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    References listed on IDEAS

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    1. Diebold, Francis X & Husted, Steven & Rush, Mark, 1991. "Real Exchange Rates under the Gold Standard," Journal of Political Economy, University of Chicago Press, vol. 99(6), pages 1252-1271, December.
    2. Edison, Hali J. & Gagnon, Joseph E. & Melick, William R., 1997. "Understanding the empirical literature on purchasing power parity: the post-Bretton Woods era," Journal of International Money and Finance, Elsevier, vol. 16(1), pages 1-17, February.
    3. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
    4. Engel, Charles & Rogers, John H, 1996. "How Wide Is the Border?," American Economic Review, American Economic Association, vol. 86(5), pages 1112-1125, December.
    5. Lothian, James R., 1997. "Multi-country evidence on the behavior of purchasing power parity under the current float," Journal of International Money and Finance, Elsevier, vol. 16(1), pages 19-35, February.
    6. Sarno,Lucio & Taylor,Mark P., 2003. "The Economics of Exchange Rates," Cambridge Books, Cambridge University Press, number 9780521485845.
    7. Lothian, James R & McCarthy, Cornelia H, 2002. "Real Exchange Rate Behaviour Under Fixed and Floating Exchange Rate Regimes," Manchester School, University of Manchester, vol. 70(2), pages 229-245, March.
    8. Cuddington, John T. & Liang, Hong, 2000. "Purchasing power parity over two centuries?," Journal of International Money and Finance, Elsevier, vol. 19(5), pages 753-757, October.
    9. Lothian, James R. & Taylor, Mark P., 1997. "Real exchange rate behavior," Journal of International Money and Finance, Elsevier, vol. 16(6), pages 945-954, December.
    10. Mussa, Michael, 1986. "Nominal exchange rate regimes and the behavior of real exchange rates: Evidence and implications," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 25(1), pages 117-214, January.
    11. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
    12. Takatoshi Ito, 1997. "Purchasing Power Parity," NBER Books, National Bureau of Economic Research, Inc, number ito_97-2, January.
    13. Alan M. Taylor, 1996. "International Capital Mobility in History: Purchasing-Power Parity in the Long Run," NBER Working Papers 5742, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Gerardo Esquivel & Raúl Razo, 2003. "Fuentes de la inflación en México, 1989-2000: Un análisis multicausal de corrección de errores," Estudios Económicos, El Colegio de México, Centro de Estudios Económicos, vol. 18(2), pages 181-226.

    More about this item

    Keywords

    Real exchange rates; purchasing power parity; exchange rate regimes; currency unions.;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange

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