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Deviations of Exchange Rates from Purchasing Power Parity: A Story Featuring Two Monetary Unions

Author

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  • Mr. Ronald MacDonald
  • Mr. Tamim Bayoumi

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 intra-national real exchange rates. Strikingly, we find that while the international real rates taken as a group appear mean-reverting, the intra-national rates are not. This is consistent with the view that while monetary shocks may be mean-reverting over the medium term, underlying real factors do generate long-term trends in real exchange rates.

Suggested Citation

  • Mr. Ronald MacDonald & Mr. Tamim Bayoumi, 1998. "Deviations of Exchange Rates from Purchasing Power Parity: A Story Featuring Two Monetary Unions," IMF Working Papers 1998/069, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:1998/069
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    Keywords

    WP; Exchange rates; stationarity; country result; testing method; panel unit root test; standard error; mean reversion; Real exchange rates; Purchasing power parity; Monetary unions; Exchange rate analysis; Europe;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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