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Unit Roots and the Real Exchange Rate Before World War I: The Case of Britain and the U.S

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  • Enders, Walter

Abstract

The popularity of the Monetary Approach to the Balance of Payments and the Exchange Rate brought renewed interest in Purchasing Power Parity (PPP). The essence of the Monetary Approach as advocated by Johnson (1976) and Frenkel (1978) was to combine a simple theory of the demand for money with the Purchasing Power Parity relationship in order to 'explain' movements in a nation's Official Settlements Balance or exchange rate. Lately, the Monetary Approach has come under attack because of large and persistent measured devia tions from PPP, Daniel (1986) and Dornbusch (1980) view these deviations as symptomatic of 'sticky' commodity prices; if commodity prices are sticky, changes in the nominal exchange rate will induce changes in the real exchange rate arid in deviations from PPP. Others attempt to explain the observed deviations within the context of a flexible-price framework; productivity changes, as in Stockman (1987), or delivery lags, as in Magee (1978), can give rise to optimal movements in a nation's real exchange rate. In spite of these different views, there is a wide support for the following synthesis of Mussa's (1979) 'stylized facts':

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  • Enders, Walter, 1987. "Unit Roots and the Real Exchange Rate Before World War I: The Case of Britain and the U.S," ISU General Staff Papers 198706010700001169, Iowa State University, Department of Economics.
    • Handle: RePEc:isu:genstf:198706010700001169
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    Cited by:

    1. Lothian, James R. & Taylor, Mark P., 1997. "Real exchange rate behavior," Journal of International Money and Finance, Elsevier, vol. 16(6), pages 945-954, December.
    2. Johnson, Paul A., 1991. "Aggregate price indexes, cointegration, and tests of the purchasing power parity hypothesis," Economics Letters, Elsevier, vol. 36(3), pages 305-309.
    3. Zeynel Abidin Ozdemir & Emre Aksoy, 2015. "Are real exchanges rate series really persistent?: evidence from three commonwealth of independent states countries," Applied Economics, Taylor & Francis Journals, vol. 47(40), pages 4299-4309, August.
    4. Tolga Omay & Furkan Emirmahmutoglu & Mubariz Hasanov, 2018. "Structural break, nonlinearity and asymmetry: a re-examination of PPP proposition," Applied Economics, Taylor & Francis Journals, vol. 50(12), pages 1289-1308, March.
    5. Alba, Joseph D. & Park, Donghyun, 2003. "Purchasing Power Parity in Developing Countries: Multi-Period Evidence Under the Current Float," World Development, Elsevier, vol. 31(12), pages 2049-2060, December.
    6. Hamid Baghestani, 1997. "Purchasing power parity in the presence of foreign exchange black markets: the case of India," Applied Economics, Taylor & Francis Journals, vol. 29(9), pages 1147-1154.
    7. Kim, Jin-Ock, 1990. "A time series analysis of the real exchange rate movement in Korea," ISU General Staff Papers 1990010108000010378, Iowa State University, Department of Economics.
    8. Steigerwald, Douglas G., 1996. "Purchasing power parity, unit roots, and dynamic structure," Journal of Empirical Finance, Elsevier, vol. 2(4), pages 343-357, February.

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