covered interest rate arbitrage in the interwar period and the keynes einzig conjecture keynes 1923 conjectured that deviations from covered interest rate parity would not be arbitraged unless a profit of at least a half of one percent on an annualized basis was available and that larger deviations would still be moderately persistent because of less than perfect elasticity of supply of arbitrage funds this two part conjecture was given further emphasis by other writers on this period notably einzig 1937 we apply nonlinear econometric techniques to a previously unexploited weekly data base for the 1920s london and new york markets and find strong support for the conjecture

a global survey of international business education in the 1990s this article presents the major findings of the fifth global curriculum survey of the academy of international business aib an examination of the status and trends in international business education around the world as of the early 1990s the survey s findings based on responses from more than 500 business schools encompass different goals and methods of internationalization international linkages and experiential activities organizational issues amounts of internationalization progress achieved and degrees of administrative satisfaction with progress achieved the overall conclusion is that considerable progress has been made but much more remains to be accomplished

purchasing power parity in the long run a cointegration approach this paper utilizes cointegration analysis to examine purchasing power parity relationships over a long time horizon the results indicate that the exchange rate is cointegrated strongly with the wholesale price index ratio and somewhat weakly with the consumer price index ratio the cointegrating coefficient between the exchange rate and the price ratio is close to one when cointegration is confirmed the hypothesis that the real exchange rate follows a random walk is rejected in most cases finally a new test for common trends finds no such common trends in exchange rates or price ratios copyright 1990 by ohio state university press

deviations from purchasing power parity in the long run this paper demonstrates that deviations from purchasing power parity reveal a remarkable and possibly startling consistency with martingale behavior during both fixed and flexible rate periods for a wide variety of countries and in both monthly and annual data since this pattern appears to be much more general than one would expect on the basis of models founded on international commodity arbitrage the paper proposes an alternative explanation which instead relies on financial arbitrage in bonds as the underlying mechanism this paper will demonstrate that deviations from purchasing power parity ppp reveal a remarkable and possibly startling consistency with martingale behavior during both fixed and flexible exchange rate periods for a wide variety of countries and in both monthly and annual data this pattern appears to be much more general than one would expect on the basis of models founded on international commodity arbitrage the paper therefore proposes an alternative explanation which does not presuppose free trade in goods but which instead relies on financial arbitrage in bonds as the underlying mechanism the major implication of the theory and the results is that ppp is as likely to be violated in the long as in the short run as an empirical matter deviations from ppp can be observed for most currencies at any instant see kravis et al 21 stockman 37 and genberg 15 among others these deviations are typically both cumulative and persistent the real exchange rate can remain on either side of parity for lengthy but variable time intervals of a year or more as a consequence the current consensus shared

national price levels purchasing power parity and cointegration a test of four high inflation economies abstract the time series properties of exchange rates and wholesale prices from four high inflation countries show some evidence in support of purchasing power parity tests for stationarity of real exchange rates and cointegration among price and exchange rate variables are presented for argentina brazil chile and israel during the 1970s and 1980s error correction models describe the mechanism of adjustment to long run equilibrium

purchasing power parity modeling and testing mean reversion abstract a model of mean reversion of exchange rates to purchasing power parity is developed and tested where exchange rates are assumed to follow a mean reverting elastic random walk toward a stochastic ppp rate the model recognizes the possibility that mean reversion towards ppp may be nonlinear which allows greater flexibility in the adjustment process regression equations consistent with the theoretical model are derived the model is tested using long and short term data for six countries while the results are generally consistent with the findings of previous studies evidence is presented which demonstrates that the mean reversion process is not linear for some countries

real exchange rates between the wars abstract bilateral real exchange rates are analyzed for fifteen countries over the period 1925 1937 using a benchmark invariant principal components technique for the period 1925 1931 half of real exchange rate variation originates from countries on floating exchange rates and half from price level differences between countries on the gold standard for the period 1931 1937 real exchange rate movements between the sterling bloc the european gold bloc and the us and canada appear dominant within bloc variation is secondary and mostly due to competitive devaluations our results support earlier evidence that the nominal exchange rate regime to a large extent determines real exchange rate variation

nonlinear purchasing power parity under the gold standard 1 introductionrecent theoretical analysis of purchasing power deviations see e g dumas 1992 sercu uppal and van hull 1995 and o connell and wei 1997 demonstrates how transactions costs or the sunk costs of international arbitrage induce nonlinear adjustment of the real exchange rate to purchasing power parity ppp globally mean reverting this nonlinear process has the important property of exhibiting near unit root behavior for small deviations from ppp since small deviations from ppp are left uncorrected if they are not large enough to cover the transactions costs or the sunk costs of international arbitrage a parametric nonlinear model suggested by the theoretical literature that captures the nonlinear adjustment process in aggregate data is the exponential smooth transition autoregression model estar of ozaki 1985 a smooth rather than discrete adjustment mechanism is motivated by the theoretical analysis of dumas 1992 also as postulated by terasvirta 1994 and demonstrated theoretically by berka 2002 in aggregate data regime changes may be smooth rather than discrete given that heterogeneous agents do not act simultaneously even if they make dichotomous decisions 1 recent empirical work e g michael nobay and peel 1997 taylor peel and sarno 2001 peel and venetis 2002 has reported empirical results that suggest that the estar model provides a parsimonious fit into a variety of data sets particular for monthly data for the interwar and postwar floating period as well as for annual data spanning 200 years as reported in lothian and taylor 1996 in addition nonlinear impulse response functions derived from the estar models show that although the speed of adjustment for small shocks around equilibrium will be highly persistent larger shocks mean revert much faster than the glacial rates previously reported for linear models rogoff 1996 in this respect the estar models provide some solution to the ppp puzzle outlined in rogoff 1996 2the estar model can also provide an explanation of why ppp deviations analyzed from a linear perspective appear to be described by either a nonstationary integrated i 1 process or alternatively described by fractional processes see e g diebold husted and rush 1991 taylor peel and sarno 2001 and pippenger and goering 1993 show that the dickey fuller tests have low power against data simulated from an estar model michael nobay and peel 1997 and byers and peel 2003 show that data that is generated from an estar process can appear to exhibit the fractional property that this would be the case was an early conjecture by acosta and granger 1995 given that the estar model has a theoretical rationale whereas the fractional process is a relatively nonintuitive one the fractional property might reasonably be interpreted as a misleading linear property of ppp deviations granger and terasvirta 1999 whereas the empirical work employing estar models provides some explanation of the glacially slow adjustment speeds obtained in linear models there is one aspect of the empirical work that is worthy of further attention a second way of explaining the rogoff puzzle raised by rogoff himself 3 is to relax the assumption that the equilibrium real exchange rate is a constant see e g canzoneri cumby and diba 1996 and chinn and johnston 1996 theoretical models such as that of balassa 1964 and samuelson 1964 imply a nonconstant equilibrium in the real exchange rate if real productivity growth rates differ between countries 4 nonlinear models that incorporate proxies for these effects are found to parsimoniously fit post bretton woods data for the main real exchange rates see venetis paya and peel 2002 and paya venetis and peel 2003 naturally models that ignore this effect may generate misleading speeds of ppp adjustment to shocks in this regard the empirical results of hegwood and papell 2002 for the gold standard period are particularly interesting

interest rates and currency prices in a two country world abstract this paper is a theoretical study of the determination of prices interest rates and currency exchange rates set in an infinitely lived two country world which is subject both to stochastic endowment shocks and to monetary instability formulas are obtained for pricing all equity claims nominally denominated bonds and currencies and these formulas are related to earlier closely related results in the theories of money finance international trade

the response of exchange rates to permanent and transitory shocks under floating exchange rates abstract using the joint behavior of inflation and real exchange rates we develop an empirical model to uncover the sources of the fluctuations in the real dollar exchange rates of four major industrial countries under the current float this model allows us to construct two time series for each country pair one representing the permanent component of each real exchange rate and the other the purely transitory component over the period as a whole transitory shocks played a relatively small but statistically significant role real dollar exchange rates therefore did not simply evolve in response to permanent shocks instead there are instances in which temporary shocks made a substantial contribution we conclude that the random walk model though an approximate statistical description of real exchange rate behavior is a poor guide to model structure jel f31

potential pitfalls for the purchasing power parity puzzle sampling and specification biases in mean reversion tests of the law of one price the ppp puzzle is based on empirical evidence that international price differences for individual goods loop or baskets of goods ppp appear highly persistent or even nonstationary the present consensus is these price differences have a half life that is of the order of five years at best and infinity at worst this seems unreasonable in a world where transportation and transaction costs appear so low as to encourage arbitrage and the convergence of price gaps over much shorter horizons typically days or weeks however current empirics rely on a particular choice of methodology involving i relatively low frequency monthly quarterly or annual data and ii a linear model specification in fact these methodological choices are not innocent and they can be shown to bias analysis towards findings of slow convergence and a random walk intuitively if we suspect that the actual adjustment horizon is of the order of days then monthly and annual data cannot be expected to reveal it if we suspect arbitrage costs are high enough to produce a substantial band of inaction then a linear model will fail to support convergence if the process spends considerable time random walking in that band thus when testing for ppp or loop model specification and data sampling should not proceed without consideration of the actual institutional context and logistical framework of markets

monetary fundamentals and exchange rate dynamics under different nominal regimes we investigate the dynamic relationship between the us dollar exchange rate and its fundamentals across different exchange rate regimes using data going back to the late 1800s or early 1900s for six industrialized countries for these countries there is evidence of a long run relation between the nominal exchange rate and monetary fundamentals consistent with conventional theories of exchange rate determination we employ a markov switching vector equilibrium correction model that allows for regime shifts in the entire set of parameters and the variance covariance matrix our results suggest that the relative importance of exchange rates and fundamentals in restoring the long run equilibrium level implied by the exchange rate monetary fundamentals model varies significantly over time and is affected by the nominal exchange rate regime in operation

testing the monetary model of exchange rate determination new evidence from a century of data abstract we test the long run monetary model of exchange rate determination for a collection of 14 industrialized countries using data spanning the late nineteenth or early twentieth century to the late twentieth century interestingly we find support for a simple form of the long run monetary model in over half of the countries we consider for these countries we estimate vector error correction models to investigate the adjustment process to the long run monetary equilibrium in the spirit of meese and rogoff journal of international economics 14 1983 3 24 we also compare nominal exchange rate forecasts based on monetary fundamentals to those based on a naive random walk model

purchasing power parity and unit root tests using panel data abstract this paper reports the results of unit root tests for real exchange rates using a panel framework this panel approach provides greatly improved power compared to conventional univariate time series unit root tests we obtain evidence supporting ppp over the recent flexible exchange rate period for g 6 and oecd countries we show explicitly that failure to find such evidence in previous research was due to the low power of the tests

real exchange rate behavior abstract using random simulations with artificial data with identical sample characteristics to the long sample exchange rate data employed by lothian and taylor lothian j r and taylor m p 1996 the recent float from the perspective of the past two centuries journal of political economy 104 488 509 we show that standard unit root tests have extremely low power over sample sizes corresponding to the recent float the probability of rejecting the null hypothesis when it is false is extremely low with 20 years or even 50 years of data and only reaches an acceptable level over much longer spans

smooth breaks and non linear mean reversion post bretton woods real exchange rates the recent literature on purchasing power parity ppp has emphasized the role of two phenomena that may lead to the rejection of the ppp hypothesis structural breaks and non linear adjustment induced by transaction costs these two hypotheses are analyzed separately in the literature we develop tests for unit roots that account jointly for structural breaks and non linear adjustment structural breaks are modeled by means of a fourier function that allows for infrequent smooth temporary mean changes and is hence compatible with long run ppp nonlinear adjustment is modeled by means of an estar model our tests present good finite sample properties the tests are applied to a set of 15 oecd countries rers and are able to reject the null of a unit root in 14 cases the breaks are usually associated with the great appreciation and later depreciation of the dollar in the 1980s and the estar adjustment appears to play an important role

do currency unions deliver more economic integration than fixed exchange rates evidence from the franc zone and the eccu in this article we develop a model to identify determinants of macroeconomic integration in the african franc zone and in dollar pegging caribbean countries including members of the east caribbean currency union these two groups of countries each comprise states using several different local currencies on the one hand the uemoa cfa franc and the cemac cfa franc both pegged to the euro on the other the eccu dollar and other national dollar pegged currencies the purpose of the analysis is to distinguish the effect of monetary union on macroeconomic integration from the effect of pegging to a common oecd currency

tests for symmetric and asymmetric nonlinear mean reversion in real exchange rates new tests based on smooth transition autoregressive models for mean reversion in time series of real exchange rates are proposed one test forces mean reversion to be symmetric about the integrated process central case while the other permits asymmetry the tests are applied to monthly series of seventeen real exchange rates against the u s dollar and fourteen against the deutsche mark they reveal stronger evidence against the unit root null hypothesis than does the usual dickey fuller test

regime linkages in the us uk real exchange rate real interest differential relation abstract using a multivariate regime switching framework and focusing on the period 1921 2002 which is characterized by different nominal exchange rate regimes and monetary regimes we find supportive evidence of the us uk real exchange rate real interest differential relation in terms of volatility regime dependence the two variables are jointly characterized by high volatility during periods of floating exchange rates and by low volatility during periods of fixed exchange rates thereby suggesting that the nominal exchange rate regime is the driving force behind the volatility regime switching thus allowing for regime switching in the real exchange rate real interest differential relation bridges the gap between popular theories of real exchange rate determination which predict such a relation and previous empirical studies which failed to uncover such a relation for the us uk real exchange rate

real and nominal exchange rates in the long run an empirical investigation abstract this paper reports on econometric tests of the hypothesis that purchasing power parity holds as a long run relationship using data on eight industrialized countries during the flexible exchange rate period the empirical work proceeds by i testing whether nominal exchange rates and relative price levels are co integrated and ii conducting impulse response analysis of long run exchange rate and relative price level changes to explain the data keynesian models suggest that shocks during the estimation period were due principally to exogenous shifts in aggregate demand while equilibrium models suggest that monetary factors have been relatively more important

potential pitfalls in determining multiple structural changes with an application to purchasing power parity we investigate the empirical performance of the bai and perron multiple structural change tests and show that the use of their critical values may cause severe size distortions in persistent series to correct these size distortions while maintaining a good power we implement the bai structural change test and extend it in two directions developing a new procedure to choose the number of breaks and a restricted version that specifically models breaks that imply mean or trend reversion using our new methodologies we reconcile the results of unit root tests with those of tests for structural change when testing for long run purchasing power parity

foreign exchange markets overview of the special issue introduction by way of abstract two decades ago exchange rate economics seemed to be in total shambles that however did not last long science proceeds by successive approximations and in the intervening years the foreign exchange market became one of the most heavily researched areas in economics the first wave of findings to come out of this new research concerned the centuries old theoretical construct of purchasing power parity and relatedly the behavior of real exchange rates here the consensus gradually shifted from the widespread view that ppp had collapsed to the view that it was in fact a useful empirical first empirical approximation in the long run as lothian and taylor 1996 put it in an introduction to the jimf conference issue on exchange rate modeling published in 1998 one of us wrote koedijk 1998 1 ten years of data and estimation techniques later the outlook is less bleak at least in the medium run a predictable relationship between exchange rates and economic fundamentals has re emerged and reintroduced tempered optimism in exchange rate economics

real exchange rate adjustment in european transition countries abstract in single equation tests real exchange rates show mean reversion for nine of 10 central and eastern european transition countries for the period january 1993 to december 2005 because of the shift from controlled to market economies and accompanying crises failed policy regimes and changes in exchange rate regimes unit root tests for transition countries often require allowance for structural changes accounting for structural breaks gives substantially faster mean reversion speeds than those found for major industrialized countries these fast adjustment speeds are plausible transition countries had perhaps 10 years to make unprecedented adjustments required for accession to the european union a number of papers have applied non linear models to the central and eastern european countries this paper investigates four non linear models and compares them with piece wise linear break models the break models appear superior in detecting mean reversion for the central and eastern european transition countries

the purchasing power parity persistence paradigm abstract rogoff journal of economic literature 1996 34 647 668 describes the remarkable consensus of 3 5 year half lives of purchasing power parity deviations among studies using long horizon data these studies however focus on rejections of unit roots in real exchange rates and do not use appropriate techniques to measure persistence our half life estimates explicitly account for serial correlation sampling uncertainty and most importantly small sample bias calculating confidence intervals as well as point estimates for long horizon and post 1973 data we find that even though most of the point estimates lie within the 3 5 year range univariate methods provide virtually no information regarding the size of the half lives

how puzzling is the ppp puzzle an alternative half life measure of convergence to ppp summary evidence of lengthy half lives for real exchange rates in the presence of a high degree of exchange rate volatility has been considered as one of the most puzzling empirical regularities in international macroeconomics this paper suggests that the measure of half life used in the literature might be problematic and proposes alternative measures with desirable properties their focus on the cumulative effects of the shocks distinguishes them from the measures used in the literature an empirical analysis of bilateral us dollar real exchange rates employing the alternative half life measure produces results consistent with theory and indicates that the ppp puzzle is less pronounced than initially thought copyright 2012 john wiley sons ltd

purchasing power parity over two centuries abstract this paper re examines the purchasing power parity hypothesis for the dollar sterling exchange rate using the two centuries of data from lothian and taylor lt 1996 real exchange rate behavior the recent float from the perspective of the past two centuries journal of political economy 104 3 488 509 unlike lt we conclude that the dollar sterling rer is nonstationary implying a rejection of the long run ppp hypothesis the differences in our conclusions are explained by 1 sensitivity of adf unit root tests to the choice of lag length and or 2 the presence of significant time trends in the adf or phillips perron unit root test equations

sectoral adjustment costs and real exchange rate dynamics in a two sector dependent economy abstract this paper develops a two sector model in which intersectoral capital movements involve adjustment costs expressed as capital lost in the transformation process these costs have important consequences for the dynamics of capital accumulation and particularly for real exchange rate dynamics persistent deviations of the real exchange rate from its equilibrium are derived and for plausible values of the adjustment cost parameters are consistent with the observed degree of real exchange rate persistence for low adjustment costs the dynamics are qualitatively similar to those of the standard heckscher ohlin technology for high adjustment costs the model converges to the specific factors model thus our framework includes these two standard models as polar extremes

across time and regimes 212 years of the us uk real exchange rate i introduction this paper examines the behavior of the real exchange rate under different nominal exchange rate regimes using monthly data on the us uk exchange rate over the period 1794 2005 the 212 yr series encompasses five floating and four fixed exchange rate periods and includes a new monthly exchange rate series for the periods that precede the classical gold standard figures 1 and 2 show the behavior of the real and nominal exchange over the entire sample three key stylized facts emerge from the analysis a real exchange rate volatility is higher when the nominal exchange rate is floating b the contribution of price level changes to real exchange rate movements has decreased over time and c the persistence of real exchange rate has been considerably higher in the postwar period the real exchange rate is the price of output in one country relative to another that is the real exchange rate is given by q e p sup p where p and p sup are home and foreign price indexes and e is the nominal exchange rate that is the home price of foreign currency a key question that can be examined with a series that includes multiple regimes is whether real exchange rate behavior is invariant to the nominal exchange rate regime that is whether the properties of q depend on whether e is fixed or floating mussa 1986 demonstrates that short term volatility of the real exchange rate is lower when the nominal exchange rate is fixed mussa s study relies on postwar data from oecd countries most of which had fixed exchange rates until bretton woods collapsed in the early 1970s and floated thereafter as grilli and kaminsky 1991 hereafter gk note relying on such limited evidence is not sufficient to establish general validity of the proposition that real exchange rate volatility is higher under floating regimes to remedy this gk examined the us uk real exchange rate using monthly data beginning in 1885 their study encompassed three fixed rate periods the classical gold standard the interwar gold exchange standard and bretton woods and three floating periods two interwar intervals and the post bretton woods float they conclude that the nominal exchange rate regime is not as crucial to the behavior of the real exchange rate as previous analyses have suggested the behavior of the real exchange rate varies substantially across historical periods but not nominal exchange rate arrangements 192 in their analysis the bretton woods period was characterized by a unique degree of stability they argue that the commonly held belief that floating exchange rates lead to higher real exchange rate volatility is an artifact of the unusual stability of the 1950s and 1960s figure 1 omitted figure 2 omitted the additional data used in this study encompass two additional floating rate periods and one additional fixed rate period gk are surely correct that real exchange rate behavior varies across different time periods due to the evolution of institutions for example decreasing transaction costs development of the financial system and increasing nominal rigidity comparing historically adjacent fixed and floating regimes provides a rough way to control for long run historical changes in order to see whether the nominal regime matters for the real exchange rate of all the periods examined bretton woods clearly has the lowest real exchange rate volatility however mussa s conclusion that real exchange rate volatility is higher in floating periods does not appear to be an artifact of this stability examining the entire 212 yr period a consistent pattern emerges every nominal regime switch from fixed to floating is associated with an increase in real exchange rate volatility and every switch from floating to fixed is associated with a decrease although there is a consistent relationship between the real exchange rate volatility and the nominal exchange rate regime the source and persistence of real exchange rate movements have evolved considerably over time

real exchange rate behavior the recent float from the perspective of the past two centuries using annual data spanning two centuries for dollar sterling and franc sterling real exchange rates we find strong evidence of mean reverting real exchange rate behavior using simple stationary autoregressive models estimated on prefloat data we easily outperform nonstationary real exchange rate models in dynamic forecasting exercises over the recent float such stationary univariate equations explain 60 80 percent of the in sample variation in real exchange rates although the degree of short run persistence may be high the econometric estimates imply a half life of shocks to the real exchange rate of about 6 years for dollar sterling and a little under 3 years for franc sterling

a theory of trust based systems of intermediation recent studies have analysed the economic benefits of belonging to high trust networks and the biological foundations of individual trust but much scepticism remains regarding the precise role of trust in economic transactions as well as gaps between micro and macro concepts of trust this paper links individual and institutional trust by modelling the costs associated with accessing market law and trust based intermediation systems and identifies the conditions under which one of the three systems may be more advantageous for rational actors and thus more likely to emerge the discussion concentrates on examples drawn from development policy to illustrate how the three systems operate together and how the failing of the trust system affects the legal and market systems

the links between international parity conditions and granger causality a study of exchange rates and prices this article investigates granger causality between exchange rates and prices for the us and four of its trading partners canada germany japan and the uk we emphasize the distinction between direct and indirect granger causality exchange rates directly cause prices if movements in exchange rates lead movement in prices and exchange rates indirectly cause prices if deviations from the purchasing power parity ppp condition can help forecast movement in prices but only by including the interest rate differential in our error correction model do we obtain results that align with economic theory the economic theory of ppp suggests that exchange rates and prices are cointegrated with exchange rates moving proportionally to prices in the long run in general we find either direct or indirect feedback mechanisms between exchange rates and prices

policy convergence the exchange rate mechanism and the misalignment of exchange rates some tests of purchasing power parity and generalized purchasing power parity the paper focuses on the convergence issues and the long run credibility of the european monetary system ems and more specifically on the evaluation of the effectiveness of the exchange rate mechanism erm in generating a stabilizing effect on real exchange rates across member countries for this purpose we execute some tests of long run purchasing power parity ppp for an erm group and a non erm group of countries using both the engle and granger procedure and the more powerful johansen cointegration technique we also execute a test of generalized ppp exploiting an idea developed by enders and hurn testing for ppp in a multicountry setting may be a useful methodology to identify the optimal currency area suggested by the data generation process on the basis of the reported homogeneity of real exchange rate behaviour of the countries considered

on exchange rates nominal and real abstract the paper first develops an australian commodity currency exchange rate model which is extended to deal with real exchange rates as well the nominal and real exchange rate versions are then tested on swiss data for the post bretton woods period while the model tracks the swiss franc nominal exchange rate vis a vis the dollar and the major european currencies very well swiss ppp real exchange rates are found to be heavily contaminated with measurement error as that error explains the large co movements in nominal and ppp real exchange rates those co movements are largely irrelevant to the ppp debate

can exchange rate variations or trade policy alter the equilibrium current account abstract paul krugman has pointed out that much work needs to be done before the intertemporal open economy model can replace the open economy is lm model as a guide to policy making the objective here is to take a step in this direction by examining if an exogenous increase in world demand for home goods as via trade policy can improve the equilibrium current account within an open economy intertemporal model in the process the paper explores the theoretical issue as to whether a variation in the real exchange rate can alter the difference between saving and investment the key idea is that uncovered interest parity plus some degree of mean reversion in the real exchange rate imply that a modern version of the laursen metzler harberger effect is operative the result is that a policy induced increase in the trade balance will alter the real exchange rate which in turn increases the difference between home saving and investment and thereby improves the equilibrium current account

an empirical examination of long run purchasing power parity using cointegration techniques this paper presents an empirical analysis of long run purchasing power parity ppp for five major exchange rates using recently developed econometric techniques on the cointegration of economic time series our empirical results are extremely unfavourable to the ppp hypothesis as a long run equilibrium condition even with an allowance made for measurement error and or tranportation costs in particular we are unable to reject the hypothesis of non cointegration of the exchange rate and relative prices for any of the countries concerned far from finding a stable long run proportionality between exchange rates and relative prices our results therefore suggest that they tend to drift apart without bound

cointegration how short is the long run abstract when testing for cointegration and faced with short sample periods it is common for researchers to turn to more frequently sampled observations that is to move from annual to quarterly or monthly data in order to increase the number of observations we argue that such a gain in the degrees of freedom is more apparent than real essentially cointegration is a long run concept and hence requires long spans of data to give tests for cointegration much power rather than merely large numbers of observations using monte carlo simulations we demonstrate this for four popular tests for cointegration

long run purchasing power parity in the 1920s abstract this paper presents an empirical analysis of long run purchasing power parity ppp during the 1920s float using recently developed methodology on the cointegration of economic time series our results are generally supportive of ppp as a long run equilibrium condition on which exchange rates tended to converge over the period for dollar sterling however there is some evidence of a non stationary drift away from fundamentals during the last year or so before britain s return to the gold standard perhaps due to speculation our results also appear to reconcile some apparently conflicting evidence in the literature

stationarity of the european real exchange rates evidence from panel data this paper employs a panel unit root test for the real exchange rates of 13 eu member countries the estimation period covers the ems period from 1980 1 to 1992 2 in contrast with the earlier panel unit root studies concerning purchasing power parity ppp effective real exchange rates are used as a result the non stationarity of the real exchange rate was rejected however the half life of the real exchange rate adjustment turned out to be long potential reasons for this might be the relatively short estimation period and the nature of the data

distance language religion and the law of one price evidence from canada and nigeria we examine the impact of physical distance language and religion on law of one price lop deviations across interwar canadian and modern nigerian cities the data comprise monthly average retail prices for narrowly defined goods collected by national statistical agencies we find that differences in the fraction of the city population sharing a common language and religion have a significant impact on lop deviations the impact of language differences is consistent with a recently developed theory in which both trade costs and differences in signal noise ratios contribute to lop deviations

real exchange rates under the gold standard purchasing power parity is one of the most important equilibrium conditions in international macroeconomics empirically it is also one of the most hotly contested numerous recent studies for example have sought to determine the validity of purchasing power parity using data from the post bretton woods float and have reached different conclusions we assert that most such studies are flawed for two reasons first the post 1973 data contain by definition only a very limited amount of the low frequency information relevant for examination of long run parity second the dynamic econometric techniques used to model deviations from parity are typically quite crude with respect to admissible low frequency dynamics both deficiencies are rectified in the present paper with dramatic results we construct a new data set of 16 real exchange rates covering more than a century of the classic gold standard period and we study deviations from parity using long memory models that allow for subtle forms of mean

the exchange rate and purchasing power parity extending the theory and tests abstract this paper analyzes the exchange rate in a no arbitrage or real business cycle equilibrium model and provides empirical evidence for this model vis a vis ppp our contribution is to show based on a generalization of the equilibrium model of exchange rates that i the test equation linking the exchange rate to fundamentals should allow for international heterogeneity in time preferences and risk attitudes as well as noise that is the model should not be tested as an exact relation ii empirical work should use levels of variables rather than first differences and iii tests on the existence of long run relations should be complemented by test on the signs of the coefficients our empirical work shows that as a long run relation the generalized model outperforms ppp moreover under the generalized model quarterly deviations from the estimated long term relation have a half life of only four to five quarters

causes of nonlinearities in low order models of the real exchange rate abstract this paper investigates the extent to which modern dsge models which feature local currency pricing home bias nontraded goods and incomplete markets can generate nonlinear real exchange rate dynamics that are consistent with those found in the time series literature using data from the current floating period our key findings are as follows first if the true model can be appropriately characterized as a set of linear equations then linearity tests that utilize univariate autoregressions of the real exchange rate suffer from an omitted variables problem which leads them to overestimate the true incidence of nonlinearity consequently studies that fail to control for this problem may spuriously find evidence of nonlinearities in the data despite the fact that the data generating process may be linear second we propose a strategy that can largely eliminate this distortion finally we find that dsge models solved using higher order approximations are capable of generating true structural nonlinearities in real exchange rates both asymptotically and in short samples

business cycles and the exchange rate system some international evidence this paper investigates the differences in time series behavior of key economic aggregates under alternative exchange rate systems we use a postwar sample of 49 countries to compare the behavior of output consumption trade flows government consumption spending and real exchange rates under alternative exchange rate systems pegged floating and cooperative systems such as the ems we then examine evidence from two particular episodes involving canada and ireland of changes in the exchange rate system aside from greater variability of real exchange rates under flexible than under pegged nominal exchange rate systems we find little evidence of systematic differences in the behavior of macroeconomic aggregates or international trade flows under alternative exchange rate systems these results are of interest because a large class of theoretical models implies that the nominal exchange rate system has important effects on a number of macroeconomic quantities

nominal exchange rate regimes and the real exchange rate abstract two assumptions about the real exchange rate are common in the literature on international finance 1 the real exchange rate is a random walk 2 the time series properties of the real exchange rate depend on the nominal exchange rate regime this paper presents evidence that indicates that the random walk behavior of the real exchange rate is only a characteristic of the post world war ii period moreover our findings also suggest that what is crucial to the real exchange rate behavior is the particular historical period rather than the nominal exchange rate arrangement

volatility and persistence of simulated dsge real exchange rates abstract we investigate the time series properties of both filtered and unfiltered real exchange rate series produced by dsge models that feature local currency pricing home bias nontraded goods and incomplete markets detrended series produced by several specifications approach the empirically observed volatility although none of the models generates enough persistence conversely several models produce unfiltered series that possess the same degree of persistence as the data but none can match its volatility

noisy information distance and law of one price dynamics across us cities abstract us micro price data at the city level suggests that both the volatility and the persistence of law of one price deviations are rising in the distance between us cities a standard two city equilibrium model with trade costs can predict the relationship between volatility and distance but not between persistence and distance we show that if there is imperfect information about the state of nominal aggregate demand with noisy signals that are asymmetric across cities then distance and persistence will be positively correlated our main results are shown to be robust to the introduction of sticky prices and multiple cities

how sure are we about purchasing power parity panel evidence with the null of stationary real exchange rates this article presents evidence on mean reversion in industrial countries real exchange rates in a setup that accounts naturally for cross sectional dependence is invariant to the benchmark currency and actually tests for the null of interest i e purchasing power parity our results are based on the kwiatkowski et al 1992 test for the stationarity null generalized in a multivariate random walk plus noise model by nyblom and harvey 2000

exchange rate expectations and the pricing of chinese cross listed stocks abstract i show that the price discounts of chinese cross listed stocks american depositary receipts adrs and h shares to their underlying a shares indicate the expected yuan us dollar exchange rate the forecasting models reveal that adr and h share discounts predict exchange rate changes more accurately than the random walk and forward exchange rates particularly at long forecast horizons using panel estimations i find that adr and h share investors form their exchange rate expectations according to standard exchange rate theories such as the harrod balassa samuelson effect the risk of competitive devaluations relative purchasing power parity uncovered interest rate parity and the risk of currency crisis

searching for stationarity purchasing power parity under the current float abstract using panel data methods we investigate long run purchasing power parity by testing for unit roots in real exchange rates of industrial countries under the current float the evidence against the unit root hypothesis is stronger for larger than for smaller panels for monthly than for quarterly data and when the german mark rather than the united states dollar is used as the base currency while we find that accounting for serial correlation considerably weakens the evidence against the unit root null the results as a whole are consistent with long run purchasing power parity

understanding the empirical literature on purchasing power parity the post bretton woods era abstract this paper argues that the empirical failure of statistical tests of ppp in post bretton woods data is largely due to the low power of the tests employed this result is demonstrated using monte carlo experiments on the size and power of different testing procedures a new procedure based on horvath and watson econometric theory 11 pp 984 1014 1995 has greater power than previous approaches using the horvath watson procedure we find moderate evidence in favor of ppp in the post bretton woods era

additional evidence of long run purchasing power parity with restricted structural change we investigate two alternative versions of purchasing power parity ppp reversion to a constant mean in the spirit of cassel and reversion to a constant trend in the spirit of balassa and samuelson using long span real exchange rate data for industrialized countries we develop unit root tests that both account for structural change and maintain a long run mean or trend with conventional tests previous research finds evidence of some variant of ppp for 9 of the 16 countries with the unit root tests in the presence of restricted structural change we find evidence of ppp for five additional countries

tests of three parity conditions distinguishing risk premia and systematic forecast errors abstract this study provides evidence that uncovered interest differentials between currencies cannot be attributed to either risk premia or systematic forecast errors alone the evidence is based on developing joint tests of three parity conditions uncovered interest parity purchasing power parity and real interest parity the study tests parameter restrictions based on knowing that risk premiums only affect nominal and real interest differentials but not inflation differentials while systematic errors in forecasting exchange rates only affect nominal interest differentials and inflation differentials but not real interest differentials the study finds a variety of cases where deviations from some or all of the parity conditions can be systematically related to variables currently known to investors and borrowers the most intriguing evidence is that for some currencies these deviations from parity are perfectly correlated as if they were driven by a common factor

evidence on the purchasing power parity in a panel of cities evidence is provided on the ppp hypothesis using a sample of 50 spanish cities for a long time period through the application of panel data unit root tests although results suggest non rejection of the ppp short run deviations as measured by half lives indicate that real factors might be causing a slow rate of convergence to a common price index even in highly integrated economies