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European Real Exchange Rates after Bretton Woods: A Re-examination

Author

Listed:
  • Rey, Serge

    (University of Pau et Pays de l’Adour)

  • Varachaud, Pascal

    (University of Pau et Pays de l’Adour)

Abstract

This paper examines the hypothesis of Purchasing Power Parity (PPP), i.e. the proposition that the equilibrium real exchange rate is a constant in the long run, in the case of Europe of the 15. For that purpose, we study the statistical properties of 14 European bilateral real exchange rates against the Deutschmark, over the period 1973-1998. These rates are constructed using consumer prices (CPI), wholesale prices (WPI) and unit labor costs (ULC). The results of various unit-root tests show that globally there is little evidence to support PPP, i. e. the stationarity hypothesis of real exchange rates is rejected. At the most, some meanreverting process are verified; in two cases with CPI, seven cases with WPI and three cases with ULC. Furthermore, general PPP with consumer prices is verified in only one case, namely between France and Germany. Finally, the evidence on bilateral real exchange rates suggests that inference on PPP is not sensitive to whether the country is a member of an European exchange system (snake and/or EMS). There is no systematic influence of exchange rate regimes.

Suggested Citation

  • Rey, Serge & Varachaud, Pascal, 2002. "European Real Exchange Rates after Bretton Woods: A Re-examination," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 17, pages 185-221.
    • Handle: RePEc:ris:integr:0191
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    Cited by:

    1. Rey, Serge, 2009. "L’apport du NATREX à la modélisation des taux de change d’équilibre : théorie et application au dollar canadien," L'Actualité Economique, Société Canadienne de Science Economique, vol. 85(2), pages 131-181, juin.
    2. Carmen Mar? Mart?ez, 2003. "The Structural Approach of a Natrex Model on Equilibrium Exchange Rates," UFAE and IAE Working Papers 588.03, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).

    More about this item

    Keywords

    Real Exchange Rate; PPP; EMS; Unit Roots; Long Memory; Mean-reversion; Structural Breaks;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • F15 - International Economics - - Trade - - - Economic Integration
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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