Fractional cointegration and real exchange rates

Guglielmo Maria Caporale and Luis A. Gil‐Alana
Authors registered in the RePEc Author Service: Luis Alberiko Gil-Alana

Review of Financial Economics, 2004, vol. 13, issue 4, 327-340

Abstract: This paper uses fractional integration and cointegration to model the DM–US dollar and the yen–US dollar real exchange rates in terms of both monetary and real factors, more specifically real interest rate and labour productivity differentials. We find that whilst the individual series may be integrated of order 1, their long‐run relationship might have a fractionally cointegrated structure. This means that mean reversion occurs, consistently with the findings of other studies. However, it also indicates, in contrast to such studies, that the cointegrating relationship possesses long memory. In other words, the error correction term responds slowly to shocks, implying that deviations from equilibrium are long‐lived. It appears that only a combination of real and monetary variables can accurately track down the movements of real exchange rates.

Date: 2004
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https://doi.org/10.1016/j.rfe.2003.12.001

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Journal Article: Fractional cointegration and real exchange rates (2004)
Working Paper: Fractional cointegration and real exchange rates (2000)
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Persistent link: https://EconPapers.repec.org/RePEc:wly:revfec:v:13:y:2004:i:4:p:327-340

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