IMF Papers on Policy Analysis and Assessment

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.

Papers on Policy Analysis and Assessment are intended to make staff work in the area of policy design available to a wide audience. A list of all PPAAs issued in 1995:2 follows. Papers may also be considered for inclusion in the journal.

“Commercial Bank Debt Restructuring—The Experience of Bulgaria,” by Aerdt C.F.J. Houben [95/6]

“Agricultural Growth in Sub-Saharan African Countries and China,” by Mahmood H. Khan and Mohsin S. Khan [95/7]

“A U.S. Value-Added Tax—A Review of the Issues,” by Saurin Shah and Christopher Towe [95/8]

“Three Propositions on African Economic Growth,” by Pierre Dhonte [95/9]

“Discrepencies in Bilateral Trade Statistics: The Case of China,” by Vivek B. Arora and Kalpana Kochhar [95/10]

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