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

44 Pages Posted: 6 Feb 1997

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

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Abstract

The paper estimates a model for the real U.S./U.K. exchange rate. The Kalman filter is used to identify a permanent and transitory component. We find the variance of the transitory component shifts among three states according to a Markov-switching process. The model is estimated by Gibbs sampling. The transitory component appears to be driven by temporary monetary phenomenon. The shifts of variance occur at times of historically significant monetary events. We find the permanent component is cointegrated with relative per capita income levels, as in the Balassa-Samuelson hypothesis. The data support a model that contains a transitory component driven by monetary phenomena and a permanent component driven by relative income levels.

JEL Classification: F31

Suggested Citation

Engel, Charles M. and Kim, Chang-Jin, The Long-Run U.S./U.K. Real Exchange Rate. Available at SSRN: https://ssrn.com/abstract=4621 or http://dx.doi.org/10.2139/ssrn.4621

Charles M. Engel (Contact Author)

University of Wisconsin - Madison - Department of Economics ( email )

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University of Washington - Department of Economics ( email )

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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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