Purchasing Power Parity and the Real Exchange Rate

Mark Taylor and Lucio Sarno

No 2913, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We assess the progress made by the profession in understanding real exchange rate behaviour, through a selective and critical but nonetheless expository review of the literature. Our reading of the literature leads us to the main conclusions that purchasing power parity might be viewed as a valid long-run international parity condition when applied to bilateral exchange rates among major industrialized countries and that also means reversion in real exchange rates displays significant non-linearities. Further work investigating the effects of real shocks on the long-run equilibrium level also seems warranted.

Keywords: Foreign exchange; Purchasing power parity; Real exchange rate (search for similar items in EconPapers)
JEL-codes: F31 (search for similar items in EconPapers)
Date: 2001-08
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Citations: View citations in EconPapers (38)

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