What Determines Real Exchange Rates? The Long and Short of It
University of Strathclyde in Glasgow - Department of Economics; Government of New Zealand - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)
IMF Working Paper No. 97/21
This paper presents a reduced-form model of the real exchange rate. Using multilateral cointegration methods, the model is implemented for the real effective exchange rates of the dollar, the mark, and the yen, over the period 1974-1993. In contrast to much other research using real exchange rates, there is evidence of significant and sensible long-run relationships for a simplified version as well as for the full version of the model. The estimated long-run relationships are used to produce dynamic equations, which outperform a random walk and produce sensible dynamic patterns in the context of an impulse response analysis.
Number of Pages in PDF File: 53
JEL Classification: F31, F32
Date posted: February 15, 2006