Purchasing Power Parity and the Real Exchange Rate

Taylor, Mark P.; Sarno, Lucio

Purchasing Power Parity and the Real Exchange Rate

CEPR Discussion Paper No. 2913

40 Pages Posted: 22 Aug 2001

See all articles by Mark P. Taylor

Mark P. Taylor

Washington University in St. Louis - John M. Olin Business School; Centre for Economic Policy Research (CEPR)

Lucio Sarno

University of Cambridge - Judge Business School; Centre for Economic Policy Research (CEPR)

Date Written: August 2001

Abstract

We assess the progress made by the profession in understanding real exchange rate behaviour, through a selective and critical but nonetheless expository review of the literature. Our reading of the literature leads us to the main conclusions that purchasing power parity might be viewed as a valid long-run international parity condition when applied to bilateral exchange rates among major industrialized countries and that mean reversion in real exchange rates displays significant non-linearities. Further work investigating the effects of real shocks on the long-run equilibrium level also seems warranted.

Keywords: Foreign exchange, purchasing power parity, real exchange rate

JEL Classification: F31

Suggested Citation: Suggested Citation

Taylor, Mark Peter and Sarno, Lucio, Purchasing Power Parity and the Real Exchange Rate (August 2001). CEPR Discussion Paper No. 2913. Available at SSRN: https://ssrn.com/abstract=280902