Working Paper: CEPR ID: DP1932
Authors: Tamim Bayoumi; Ronald MacDonald
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.
Keywords: exchange rates; stationarity
JEL Codes: C12; C23; F31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Monetary shocks (E39) | International real exchange rates (F31) |
| International real exchange rates (F31) | Mean reversion (C29) |
| Real economic factors (E39) | Relative prices within countries (P22) |
| Monetary shocks (E39) | Deviations from PPP (F31) |
| Real factors (F29) | Persistent deviations in relative prices (E39) |