Discussion paper

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

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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Citation

MacDonald, R and T Bayoumi (1998), ‘DP1932 Deviations of Exchange Rates from Purchasing Power Parity: A Story Featuring Two Monetary Unions‘, CEPR Discussion Paper No. 1932. CEPR Press, Paris & London. https://cepr.org/publications/dp1932