This paper analyzes long-term exchange rate modeling. The paper reviews the literature that tests for a unit root in real exchange rates and the closely related work on testing for a unit root in the residual from a regression of the nominal exchange rate on relative prices. It argues that the balance of evidence is supportive of the existence of some form of long-term exchange rate relationship. The paper highlights that the form of this relationship, however, does not accord exactly with a traditional representation of the long-term exchange rate.

Abstract

This paper analyzes long-term exchange rate modeling. The paper reviews the literature that tests for a unit root in real exchange rates and the closely related work on testing for a unit root in the residual from a regression of the nominal exchange rate on relative prices. It argues that the balance of evidence is supportive of the existence of some form of long-term exchange rate relationship. The paper highlights that the form of this relationship, however, does not accord exactly with a traditional representation of the long-term exchange rate.

Staff Papers draws on IMF Working Papers, which are research studies by members of the Fund’s staff. A list of Working Papers issued in 1995:2 follows.

“The Employment and Wage Effects of Oil Price Changes: A Sectoral Analysis,” by Michael Keane and Eswar Prasad [95/37]

“Bank Lending Rates and Financial Structure in Italy: A Case Study,” by Carlo Cottarelli, Giovanni Ferri, and Andrea Generale [95/38]

“Saving Trends in Southeast Asia: A Cross-Country Analysis,” by Hamid Faruqee and Aasim M. Husain [95/39]

“Recession and Recovery in the United Kingdom in the 1990s: A Vector Autoregression Approach,” by Luis Catao and Ramana Ramaswamy [95/40]

“Exchange Rate Movements and Inflation Performance: The Case of Italy,” by Robert Ford and Thomas Krueger [95/41]

“Exchange Rate Bands and Shifts in the Stabilization Policy Regime: Issues Suggested by the Experience of Colombia,” by Alberto Carrasquilla [95/42]

“Who Needs Bands? Exchange Rate Policy Before EMU,” by Tamim Bayoumi [95/43]

“Stabilization in the Baltic Countries: A Comparative Analysis,” by Tapio O. Saavalainen [95/44]

“Growth, Nontradables, and Price Convergence in the Baltics,” by Anthony Richards and Gunnar Tersman [95/45]

“The Taxation of Financial Assets: A Survey of Issues and Country Experiences,” by Vito Tanzi and John King [95/46]

“Auction Format Matters: Evidence on Bidding Behavior and Seller Revenue,” by Robert A. Feldman and Vincent Reinhart [95/47]

“The Burden of Sub-Saharan African Own Commitments in the Uruguay Round—Myth or Reality?” by Piritta Sorsa [95/48]

“Fiscal Deficit and Public Debt in Industrial Countries, 1970–1994,” by Vito Tanzi and Domenico Fanizza [95/49]

“Fiscal Implications of Trade Liberalization,” by David Bevan [95/50]

“International Evidence on the Determinants of Private Saving,” by Paul R. Masson, Tamim Bayoumi, and Hossein Samiei [95/51]

“Hysteresis in Exports,” by Giorgia Giovannetti and Hossein Samiei [95/52]

“The Peace Dividend: Military Spending Cuts and Economic Growth,” by Malcolm Knight, Norman Loayza, and Delano Villanueva [95/53]

“Relative Price Convergence in Russia,” by Paula de Masi and Vincent Koen [95/54]

“Asset Market and Balance of Payments Characteristics: An Eclectic Exchange Rate Model for the Dollar, Mark, and Yen,” by Ronald MacDonald [95/55]

“NonLinear Effects of Inflation on Economic Growth,” by Michael Sarel [95/56]

“Capital Flows in Central and Eastern Europe: Evidence and Policy Options,” by Guillermo Calvo, Ratna Sahay, and Carlos A. Végh [95/57]

“Informational Efficiency in Developing Equity Markets,” by Paul Cashin and C. John McDermott [95/58]

“Foreign Direct Investment in the World Economy,” by Edward M. Graham [95/59]

“International Financial Flows and Transactions Taxes: Survey and Options,” by Paul Bernd Spahn [95/60]

“The Nordic Banking Crises: Pitfalls in Financial Liberalization?” by Burkhard Drees and Ceyla Pazarbaşioğlu [95/61]

“Growth Effects of Income and Consumption Taxes: Positive and Normative Analysis,” by Gian Maria Milesi-Ferretti and Nouriel Roubini [95/62]

“Some Considerations Relevant to Prefunded Pensions in France,” by Joaquim V. Levy [95/64]