The Behaviour of the Real Exchange Rate: Evidence from an Alternative Price Index

39 Pages Posted: 13 Nov 2003

See all articles by Ibrahim Chowdhury

Ibrahim Chowdhury

University of Oxford

Lucio Sarno

City University London - Sir John Cass Business School; Centre for Economic Policy Research (CEPR)

Abstract

Although the long-run purchasing power parity (PPP) hypothesis is expected to hold across tradable goods, all price indices available to researchers for testing the validity of PPP contain some proportion of non-tradable goods prices, which may generate substantial persistence in the real exchange rate. We construct time series for quarterly price indices that minimize the presence of non-tradable goods for six major economies. Applying recently developed nonlinear econometric techniques to the resulting five US dollar real exchange rate series for the recent floating exchange rate regime, we provide evidence that the nonlinear mean reverting properties of these real exchange rate series are stronger than the mean reverting properties of real exchange rate time series constructed using the consumer price index (CPI). In turn, these results have a natural economic interpretation.

JEL Classification: F31

Suggested Citation

Chowdhury, Ibrahim and Sarno, Lucio, The Behaviour of the Real Exchange Rate: Evidence from an Alternative Price Index. Economic Notes, Vol. 32, pp. 295-333, November 2003. Available at SSRN: https://ssrn.com/abstract=465535

Ibrahim Chowdhury

University of Oxford ( email )

Oxford
United Kingdom
+44 1865 282 892 (Phone)

Lucio Sarno (Contact Author)

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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