DP1932 Deviations of Exchange Rates from Purchasing Power Parity: A Story Featuring Two Monetary Unions

Author(s): Tamim Bayoumi, Ronald MacDonald
Publication Date: July 1998
Keyword(s): Exchange Rates, stationarity
JEL(s): C12, C23, F31
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=1932

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.