Purchasing Power Parity and the Real Exchange Rate
40 Pages Posted: 22 Aug 2001
Date Written: August 2001
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