Nominal Exchange Rate Regimes and the Real Exhange Rate, Evidence from the U.S. And Britain, 1885-1986

36 Pages Posted: 19 Jun 2004

See all articles by Vittorio Grilli

Vittorio Grilli

Independent; National Bureau of Economic Research (NBER)

Graciela Kaminsky

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

Date Written: August 1989

Abstract

Two propositions are common in the international finance literature: (1) the real exchange rate is a random walk, (2) the real exchange rate time series properties essentially depend on the nominal exchange rate regime. The first proposition has been used in support of the claim that PPP cannot even be considered a long run relationship since deviations from it are permanent in nature. The second proposition has been used as evidence of price stickiness. Contrary to the first proposition, this paper presents evidence that the random walk behavior of the real exchange rate is just a characteristic of the post-WWII period, while in the prewar period we observe the presence of transitory fluctuations. Also, although real exchange rate volatility appears to be different between fixed and flexible exchange rate regimes, these differences are not as systematic and large as the postwar data suggest.

Suggested Citation

Grilli, Vittorio and Kaminsky, Graciela, Nominal Exchange Rate Regimes and the Real Exhange Rate, Evidence from the U.S. And Britain, 1885-1986 (August 1989). NBER Working Paper No. w3067. Available at SSRN: https://ssrn.com/abstract=463492

Vittorio Grilli

Independent

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Graciela Kaminsky (Contact Author)

National Bureau of Economic Research (NBER)

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HOME PAGE: http://www.gracielakaminsky.com/

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