Economics Research Institute Study Paper
Utah State University Department of Economics
Copyright for this work is held by the author. Transmission or reproduction of materials protected by copyright beyond that allowed by fair use requires the written permission of the copyright owners. Works not in the public domain cannot be commercially exploited without permission of the copyright owner. Responsibility for any use rests exclusively with the user. For more information contact the Institutional Repository Librarian at email@example.com.
Do bilateral real exchange rates contain stochastic trends? This paper concentrates on univariate time-series models and uses the Beveridge-Nelson decomposition method to provide evidence that real exchange rates for dollar-deutsche mark, dollar-yen, dollar-pound, and dollar-Swiss franc contain stochastic trends. Using quarterly data for the period 1971 I to 1993 IV, we find that real exchange rates are nonstationary stochastic process which do not revert to a deterministic path. Two implications of this empirical findings is highlighted in this study. First, what is perceived as excessive fluctuations in the real exchange rate may not actually be so since the equilibrium itself shifts over time. Second, the empirical validity of the purchasing power parity theory needs to be examined within the framework of an econometric model that treats the real exchange rate as containing stochastic trends.
Mohapatra, Sarita; Biswas, Basudeb; and Snyder, Donald L., "Variable Trend in Real Exchange Rates" (1996). Economic Research Institute Study Papers. Paper 105.