Working Paper: CEPR ID: DP2913
Authors: Lucio Sarno; Mark P. Taylor
Abstract: 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.
Keywords: Foreign Exchange; Purchasing Power Parity; Real Exchange Rate
JEL Codes: F31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Purchasing Power Parity (PPP) (F31) | Real exchange rates (F31) |
| Deviations from PPP (F31) | Adjustments in exchange rates (F31) |
| Deviations from PPP (F31) | Mean reversion in real exchange rates (F31) |
| Distance from long-run equilibrium (D59) | Speed of mean reversion in real exchange rates (F31) |
| Real shocks (E39) | Long-run equilibrium levels of exchange rates (F31) |