The Long-Run U.S./U.K. Real Exchange Rate

39 Pages Posted: 14 Jun 2000 Last revised: 16 Oct 2021

See all articles by Charles M. Engel

Charles M. Engel

University of Wisconsin - Madison - Department of Economics; National Bureau of Economic Research (NBER); University of Washington - Department of Economics

Chang-Jin Kim

Dept. of Economics, University of Washington

Multiple version iconThere are 2 versions of this paper

Date Written: September 1996

Abstract

We investigate the behavior of the long-run U.S./U.K. real exchange rate from 1885 to 1995. Our long-run real exchange rate series is derived from an unobserved components model which divides the real exchange rate into permanent and transitory components. The transitory component is modeled as having variances which switch, according to a Markov-switching process, among low, medium and high variance states. The underlying assumptions of our time-series model are based on an economic theory in which the permanent component represents real influences, while the transitory component represents primarily short-run movements due to nominal exchange rate fluctuations. Because the model is difficult to estimate by standard methods, we describe how the method of Gibbs sampling can handle this model. We find that our long-run real exchange rate series moves similarly to other measures proposed in the literature based on economic models.

Suggested Citation

Engel, Charles M. and Kim, Chang-Jin, The Long-Run U.S./U.K. Real Exchange Rate (September 1996). NBER Working Paper No. w5777, Available at SSRN: https://ssrn.com/abstract=225588

Charles M. Engel (Contact Author)

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Chang-Jin Kim

Dept. of Economics, University of Washington ( email )

Department of Economics (Box 353330)
University of Washington
Seattle, WA 98195-3330
United States

HOME PAGE: http://https://econ.washington.edu/people/chang-jin-kim

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