Real and Nominal Exchange Rates in the Long Run
June 1, 1991
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Summary
This paper decomposes longer-run movements in (major) dollar real exchange rates into components associated with changes in nominal exchange rates and price levels, and their comovements. Though the decompositions suggest some permanent movements, they imply that there are large transitory components in real exchange rates. These transitory components in real exchange rates are found to be closely associated with those in nominal exchange rates. A stochastic version of Dornbusch’s overshooting model—configured with representative parameter values for the United States and subjected to permanent nominal shocks—can rationalize these transitory comovements of nominal and real exchange rates as well as several other features of the decompositions.
Subject: Capacity utilization, Exchange rate adjustments, Exchange rates, Foreign exchange, Production, Purchasing power parity, Real exchange rates
Keywords: Capacity utilization, Exchange rate adjustments, exchange rate movement, Exchange rates, nominal exchange rate, nominal exchange rate change, nominal exchange rate line, price change, price level change, Purchasing power parity, real exchange rate, Real exchange rates, WP
Pages:
31
Volume:
1991
DOI:
Issue:
063
Series:
Working Paper No. 1991/063
Stock No:
WPIEA0631991
ISBN:
9781451848328
ISSN:
1018-5941
