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Abstract:
By exploiting the information in a panel data set, this paper is able to
construct more powerful tests of various hypotheses on the determinants of real
exchange rates than would be possible with single-country time-series data.
Focusing on annual data for 20 industrial countries from 1973 through 1995,
there are three major results. First, the evidence for a stationary real
exchange rate is stronger when the exchange rate is defined in terms of
wholesale prices than consumer prices, presumably because of the greater
tradability of wholesale commodities. Second, the half-life of shocks to the
real exchange rate is between two and three years. Third, there is a
significant and robust relationship between real exchange rates and net foreign
assets.
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