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The Behaviour of the Real Exchange Rate: Evidence from an Alternative Price Index
Author(s) -
Sarno Lucio,
Chowdhury Ibrahim
Publication year - 2003
Publication title -
economic notes
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.274
H-Index - 19
eISSN - 1468-0300
pISSN - 0391-5026
DOI - 10.1111/1468-0300.00115
Subject(s) - purchasing power parity , economics , exchange rate , econometrics , mean reversion , price index , index (typography) , relative price , series (stratigraphy) , relative purchasing power parity , financial economics , macroeconomics , computer science , world wide web , paleontology , biology
Although the long–run purchasing power parity (PPP) hypothesis is expected to hold across tradable goods, all price indices available to researchers for testing the validity of PPP contain some proportion of non–tradable goods prices, which may generate substantial persistence in the real exchange rate. We construct time series for quarterly price indices that minimize the presence of non–tradable goods for six major economies. Applying recently developed nonlinear econometric techniques to the resulting five US dollar real exchange rate series for the recent floating exchange rate regime, we provide evidence that the nonlinear mean reverting properties of these real exchange rate series are stronger than the mean reverting properties of real exchange rate time series constructed using the consumer price index (CPI). In turn, these results have a natural economic interpretation. (J.E.L.: F31).