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Fundamental determinants of the long run real exchange rate: The case of Norway

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Modelling the Norwegian exchange rate against a basket of currencies, we find a robust long-term link between the real exchange rate and real interest differential that is consistent with purchasing power parity (PPP) and uncovered interest parity (UIP). However, PPP alone is rejected. These findings are confirmed focusing on the Norwegian bilateral exchange rate with Germany and (possibly) Sweden, but rejected against the UK and the US. We argue that rejection of bilateral relationships may result from idiosyncratic shocks in the different countries that may be negligible when modelling against a basket of currencies.

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  • Hilde Christiane Bjørnland & Håvard Hungnes, 2002. "Fundamental determinants of the long run real exchange rate: The case of Norway," Discussion Papers 326, Statistics Norway, Research Department.
    • Handle: RePEc:ssb:dispap:326
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    Cited by:

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    3. Hilde C Bjørnland & Håvard Hungnes, 2008. "The Commodity Currency Puzzle," The IUP Journal of Monetary Economics, IUP Publications, vol. 0(2), pages 7-30, May.
    4. Alexeeva-Talebi, Victoria, 2010. "Cost pass-through in strategic oligopoly: Sectoral evidence for the EU ETS," ZEW Discussion Papers 10-056, ZEW - Leibniz Centre for European Economic Research.
    5. Alessandra Pasqualina Viola & Margarida Sarmiento Gutierrez & Claudio Henrique Barbedo & Andre Luiz Carvalhal da Silva, 2013. "Impact of exchange rate swaps on the dollar coupon curve: an analysis according to principal components regression," Brazilian Business Review, Fucape Business School, vol. 10(1), pages 79-101, January.
    6. Thomas L Bradley & Paul B Eberle, 2023. "Purchasing Power Parity In Russia And The Transitioning Economy 1990-1995," Review of Economic and Business Studies, Alexandru Ioan Cuza University, Faculty of Economics and Business Administration, issue 31, pages 85-111, June.
    7. Abdalrahman AbuDalu & Elsadig Musa Ahmed, 2013. "The long and short run forcing variables of purchasing power parity of ASEAN-5," E3 Journal of Business Management and Economics., E3 Journals, vol. 4(3), pages 066-081.
    8. Håvard Hungnes & Hilde C. Bjørnland, 2006. "The importance of interest rates for forecasting the exchange rate," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 25(3), pages 209-221.
    9. Hilde Bjørnland, 2004. "The Role of the Exchange Rate as a Shock Absorber in a Small Open Economy," Open Economies Review, Springer, vol. 15(1), pages 23-43, January.
    10. Doojav, Gan-Ochir, 2011. "The role of exchange rate in Mongolia: A shock absorber or a source of shocks?," MPRA Paper 72145, University Library of Munich, Germany, revised Nov 2011.

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    More about this item

    Keywords

    Purchasing power parity; uncovered interest parity; cointegration VAR.;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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