Currency Union and Real Exchange Rate Behavior

Momento Economico, 2001

25 Pages Posted: 7 Nov 2004  

James R. Lothian

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

Cornelia H. McCarthy

Gabelli School of Business, Fordham University

Abstract

In this paper we study the behavior of the real exchange rate of three American currencies relative to the U.S. dollar: the Canadian dollar, the Mexican peso and the Panamanian balboa. Our principal objective in doing so is to investigate the effects of alternative exchange-rate regimes, including currency union, on real exchange rate behavior. In each of these three cases we find at least some evidence supporting the purchasing power parity hypothesis in the data that we examine. Our second set of conclusions concerns the criticisms recently directed at the empirical exchange-rate literature. An important criterion underlying our choice of countries was diversity of experience with regard to the exchange-rate regime. The objective was to design an experiment in which meaningful comparisons of behavior across regimes would be possible.

Keywords: Real exchange rates, purchasing power parity, exchange rate regimes, currency unions

JEL Classification: F31

Suggested Citation

Lothian, James R. and McCarthy, Cornelia H., Currency Union and Real Exchange Rate Behavior. Momento Economico, 2001. Available at SSRN: https://ssrn.com/abstract=613921

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)
212-765-5573 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Cornelia H. McCarthy

Gabelli School of Business, Fordham University ( email )

113 West 60th Street
New York, NY 10023
United States
212-636-6139 (Phone)

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