Deviations of Exchange Rates from Purchasing Power Parity: A Story Featuring Two Monetary Unions
CEPR Discussion Paper Series No. 1932
Posted: 4 Dec 1998
Date Written: July 1998
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 are 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.
JEL Classification: C12, C23, F31
Suggested Citation: Suggested Citation