On Interpreting the Random Walk Behavior of Nominal and Real Exchange Rates
January 1, 1991
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Summary
The random walk property of exchange rates is frequently regarded as carrying strong implications for the kinds of shocks that have driven exchange rates and the models appropriate for analyzing their behavior. This paper conducts stochastic simulations of Dornbusch’s (1976) sticky-price monetary model, calibrated for representative parameter values for the United States. It shows that the model is capable of generating time series for both real and nominal exchange rates that are statistically indistinguishable from random walks when all shocks are nominal.
Subject: Exchange rates, Foreign exchange, Forward exchange rates, Monetary base, Money, Purchasing power parity, Real exchange rates, Spot exchange rates
Keywords: Augmented Dickey-Fuller statistic, Box-Ljung Q, Exchange rates, Forward exchange rates, Monetary base, money supply innovation, nominal exchange rate, price level, random walk finding, random walk property, Real exchange rates, Spot exchange rates, stochastic process, test statistics, unit root, WP
Pages:
22
Volume:
1991
DOI:
Issue:
007
Series:
Working Paper No. 1991/007
Stock No:
WPIEA0071991
ISBN:
9781451842340
ISSN:
1018-5941
Notes
Also published in Staff Papers, Vol. 38, No. 4, December 1991.
