Deviations of Exchange Rates from Purchasing Power Parity: A Story Featuring Two Monetary Unions

May 1, 1998

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

We examine the mean-reverting properties of real exchange rates, by comparing the unit root properties of a group of international real exchange rates with two groups of intra-national real exchange rates. Strikingly, we find that while the international real rates taken as a group appear mean-reverting, the intra-national rates are not. This is consistent with the view that while monetary shocks may be mean-reverting over the medium term, underlying real factors do generate long-term trends in real exchange rates.

Subject: Economic integration, Exchange rate analysis, Exchange rates, Foreign exchange, Monetary unions, Purchasing power parity, Real exchange rates

Keywords: country result, Europe, Exchange rate analysis, Exchange rates, mean reversion, Monetary unions, panel unit root test, Purchasing power parity, Real exchange rates, standard error, stationarity, testing method, WP

Pages:
17
Volume:
1998
DOI:
https://doi.org/10.5089/9781451960846.001
Issue:
069
Series:
Working Paper No. 1998/069
Stock No:
WPIEA0691998
ISBN:
9781451960846
ISSN:
1018-5941

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Notes

Also published in Staff Papers, Vol. 46, No. 1, March 1999.

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