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

Author(s): Tamim Bayoumi and Ronald MacDonald

Publication Date: July 1998

Keyword(s): Exchange Rates and stationarity

Programme Area(s): International Macroeconomics

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 are 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.

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Bibliographic Reference

Bayoumi, T and MacDonald, R. 1998. 'Deviations of Exchange Rates from Purchasing Power Parity: A Story Featuring Two Monetary Unions'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=1932