Nominal Exchange Rate Regimes and the Real Exhange Rate, Evidence from the U.S. and Britain, 1885-1986
Vittorio U. Grilli
Two propositions are common in the international finance
literature: (1) the real exchange rate is a randoM walk, (2) the real
exchange rate time series properties essentially depend on the nominal
exchange rate regime. The first proposition has been used in support
of the claim that PPP cannot even be considered a long run
relationship since deviations from it are permanent in nature. The
second proposit i on has been used as evidence of price stickiness.
Contrary to the first proposition, this paper presents evidence that
the random walk behavior of the real exchange rate is just a
characteristic of the post-WWII period, while in the prewar period we
observe the presence of transitory fluctuations. Also, although real
exchange rate volatility appears to be different between fixed and
flexible exchange rate regimes, these differences are not as
systematic and large as the postwar data suggest.
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