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What Determines Real Exchange Rates? The Long and the Short of It

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Equilibrium Exchange Rates

Part of the book series: Recent Economic Thought Series ((RETH,volume 69))

Abstract

Recently there has been a revival of interest in modelling the long-run behaviour of nominal bilateral exchange rates using ‘fundamentals’ such as relative prices.2 In general, this line of research has established that for the recent floating period weak-form purchasing power parity (PPP) would seem to hold on a single currency basis, but strong-form PPP does not.3 Additionally, the adjustment to equilibrium in PPP-based equations is painfully slow. In order to obtain strong-form PPP results, and relatively rapid adjustment, researchers have used long runs of historical time series data (see, for example, Abuaf and Jorion (1990), Diebold, Husted and Rush (1991) and Mark (1998), or panel data sets defined for the recent float (see, for example, Frankel and Rose (1996), MacDonald (1988) and Wei and Parsely (1995)).

This paper was begun when I was a visiting scholar in the Research Department of the International Monetary Fund. I am grateful to Tamim Bayoumi, Peter Clark, Steven Husted, Peter Isard and Ian Marsh for helpful comments on the first draft of the paper.

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Authors
  1. Ronald MacDonald
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Editors and Affiliations

  1. University of Strathclyde, UK

    Ronald MacDonald

  2. Brown University, USA

    Jerome L. Stein

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MacDonald, R. (1999). What Determines Real Exchange Rates? The Long and the Short of It. In: MacDonald, R., Stein, J.L. (eds) Equilibrium Exchange Rates. Recent Economic Thought Series, vol 69. Springer, Dordrecht. https://doi.org/10.1007/978-94-011-4411-7_9

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  • DOI: https://doi.org/10.1007/978-94-011-4411-7_9

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