Deviations of Exchange Rates from Purchasing Power Parity: A Story Featuring Two Monetary Unions
IMF Working Papers, May 1, 1998
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- Deviations of Exchange Rates from Purchasing Power Parity: A Story Featuring Two Monetary Unions
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Bibliographic details
- Authors: Ronald MacDonald, Tamim Bayoumi
- Published: May 1, 1998
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451960846.001
Summary and main findings
- The paper examines 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.
- Main empirical result: while the international real rates taken as a group appear mean-reverting, the intra-national rates are not.
- Interpretation provided: this pattern is consistent with the view that monetary shocks may be mean-reverting over the medium term, whereas underlying real factors do generate long-term trends in real exchange rates.
Methodology and analytical approach
- Comparative unit root analysis of three groups:
- a group of international real exchange rates,
- two groups of intra-national real exchange rates.
- Use of panel unit root test and stationarity testing methods (as indicated by keywords).
Implications and interpretation
- Monetary shocks:
- May be mean-reverting over the medium term (consistent with observed mean reversion in international real rates).
- Real factors:
- May generate long-term trends in real exchange rates (consistent with lack of mean reversion in intra-national rates).
- Implication for Purchasing Power Parity (PPP) analysis:
- Deviations from PPP can reflect different dynamics across international versus intra-national contexts, with persistence driven by real factors within countries.