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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