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Real Exchange Rate Behavior: The Recent Float from the Perspective of the Past Two Centuries

JOURNAL OF POLITICAL ECONOMY, Vol. 104, No. 3, June 1996

Posted: 28 Jun 1998  

James R. Lothian

Gabelli School of Business, Fordham University; National Bureau of Economic Research (NBER)

Mark P. Taylor

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

Abstract

Using annual data spanning two centuries for dollar-sterling and franc-sterling real exchange rates, we find strong evidence of mean-reverting real exchange rate behavior. Using simple, stationary, autoregressive models estimated on prefloat data, we easily outperform nonstationary real exchange rate models in dynamic forecasting exercises over the recent float. Such stationary univariate equations explain 60-80 percent of the in-sample variation in real exchange rates, although the degree of short-run persistence may be high. The econometric estimates imply a half-life of shocks to the real exchange rate of about 6 years for dollar-sterling and a little under 3 years for franc-sterling.

JEL Classification: F31, F39, N10

Suggested Citation

Lothian, James R. and Taylor, Mark P., Real Exchange Rate Behavior: The Recent Float from the Perspective of the Past Two Centuries. JOURNAL OF POLITICAL ECONOMY, Vol. 104, No. 3, June 1996. Available at SSRN: https://ssrn.com/abstract=4083

James R. Lothian (Contact Author)

Gabelli School of Business, Fordham University ( email )

113 West 60th Street
New York, NY 10023
United States
212-636-6147 (Phone)
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National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
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Mark Peter Taylor

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1156
St. Louis, MO 63130-4899
United States

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

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