On Interpreting the Random Walk Behavior of Nominal and Real Exchange Rates
IMF Working Papers, January 1, 1991
Source details
- Canonical URL
- On Interpreting the Random Walk Behavior of Nominal and Real Exchange Rates
Other formats
Bibliographic details
- Authors: Charles Adams, Bankim Chadha
- Published: January 1, 1991
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451842340.001
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.
Methodology
- Stochastic simulations of Dornbusch’s (1976) sticky-price monetary model.
- Calibration: representative parameter values for the United States.
- Statistical evaluation: tests to assess whether simulated time series for real and nominal exchange rates are distinguishable from random walks.
Key findings
- The Dornbusch (1976) sticky-price monetary model, under calibration for the United States and with all shocks being nominal, can generate time series for:
- Real exchange rates that are statistically indistinguishable from random walks.
- Nominal exchange rates that are statistically indistinguishable from random walks.
- Implication: Random walk behavior in exchange rates does not necessarily imply real shocks; nominal shocks within a standard sticky-price monetary model can produce similar statistical behavior.
Subject areas and keywords
- 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