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Staff Papers Logo    March 1999
Volume 46, Number 1
Deviations of Exchange Rates from Purchasing Power Parity: A Story Featuring Two Monetary Unions
By Tamim Bayoumi and Ronald MacDonald

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Abstract: 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 intranational real exchange rates. Strikingly, we find that while the international real rates taken as a group appear mean reverting, the intranational rates are not. This is consistent with the view that while nominal shocks may be mean reverting over the medium term, underlying real factors do generate long-term trends in real exchange rates. [JEL C12, C23, F31]

1999 International Monetary Fund