DP2913 Purchasing Power Parity and the Real Exchange Rate

Author(s):	Lucio Sarno, Mark P Taylor
Publication Date:	August 2001
Keyword(s):	foreign exchange, purchasing power parity, real exchange rate
JEL(s):	F31
Programme Areas:	International Macroeconomics
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=2913

We assess the progress made by the profession in understanding real exchange rate behaviour, through a selective and critical but nonetheless expository review of the literature. Our reading of the literature leads us to the main conclusions that purchasing power parity might be viewed as a valid long-run international parity condition when applied to bilateral exchange rates among major industrialized countries and that also means reversion in real exchange rates displays significant non-linearities. Further work investigating the effects of real shocks on the long-run equilibrium level also seems warranted.