On Interpreting the Random Walk Behavior of Nominal and Real Exchange Rates

Charles Adams and Bankim Chadha

No 1991/007, IMF Working Papers from International Monetary Fund

Abstract: The random walk property of exchange rates is frequently regarded as carrying strong implications for the kinds of shocks that have driven exchange rates and the models appropriate for analyzing their behavior. This paper conducts stochastic simulations of Dornbusch’s (1976) sticky-price monetary model, calibrated for representative parameter values for the United States. It shows that the model is capable of generating time series for both real and nominal exchange rates that are statistically indistinguishable from random walks when all shocks are nominal.

Keywords: WP; unit root; nominal exchange rate; price level; stochastic process; random walk property; test statistics; money supply innovation; random walk finding; Augmented Dickey-Fuller statistic; Box-Ljung Q; Real exchange rates; Exchange rates; Monetary base; Forward exchange rates; Spot exchange rates (search for similar items in EconPapers)
Pages: 22
Date: 1991-01-01
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