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On Interpreting the Random Walk and Unit Root in Nominal and Real Exchange Rates

Author

Listed:
  • Charles Adams

    (International Monetary Fund)

  • Bankim Chadha

    (International Monetary Fund)

Abstract

The random walk property of exchange rates is regarded as carrying implications for the kinds of shocks that have driven exchange rates and the models appropriate for analyzing their behavior. This paper describes the results of stochastic simulations of Dornbusch's (1976) sticky-price monetary model, calibrated for representative parameter values for the United States. The paper shows that when all shocks are nominal, the model generates time series for real and nominal exchange rates that are statistically indistinguishable from random walks and that cointegration tests can provide misleading information about long-run relationships between the variables in the model.

Suggested Citation

  • Charles Adams & Bankim Chadha, 1991. "On Interpreting the Random Walk and Unit Root in Nominal and Real Exchange Rates," IMF Staff Papers, Palgrave Macmillan, vol. 38(4), pages 901-920, December.
    • Handle: RePEc:pal:imfstp:v:38:y:1991:i:4:p:901-920
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    Cited by:

    1. Erick M. Kitenge & A. K. M. Mahbub Morshed, 2020. "On Cross-Country Differences in the Contribution of Nontraded Goods to Real Exchange Rate Fluctuations," Open Economies Review, Springer, vol. 31(5), pages 1117-1145, November.

    More about this item

    JEL classification:

    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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