The Determination of the Real Exchange Rate in the Long-Run Evidence From UK

8/9/2019 The Determination of the Real Exchange Rate in the Long-Run Evidence From UK

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The Determination of the Real

Exchange Rate in the Long-Run:

Evidence from United Kingdom

George IordacheFinancial Economics Dissertation

!"#$%

&'stract

This (a(er focuses on the determination of the real exchange rate in the long-run having as adomestic countr) the United Kingdom and as a (artner countr) the United *tates+ The maindeterminants ,hich are examined are: Total investment as a (ercentage of GD. Inflation.Unem(lo)ment. Terms of trade differentials. GD (er ca(ita differential and #"-)ear

government 'onds real interest rate differentials+ *** /L* regression ,ill 'e used on annualdata #01"-!"#2% to anal)3e the relationshi( 'et,een the a'ove varia'les and the realexchange rate in the long-run+

The main limitation of this (a(er is the methodolog) used. sim(le /L* regression ,hichmight also 'e the reason 'ehind the interesting results o'served+ &ccording to (revious (a(ersTerms of trade differentials should 'e a determinant of the real exchange rate 'ut 'ecause thenature of the relationshi( is not linear. the /L* regression fails to vie, this varia'le as adeterminant+

Ke),ords: real exchange rate determination, economic fundamentals, PPP, FEER, BEER,United Kingdom

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Statement of Authenticity

I certify that this dissertation is all my

own wor!

"eorge Iordache# $ay, %&'(

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Contents1. Area and context of research...................4

2. Theoretical Frae!or".............................5

2.1 P#rchasing Po!er Parit$.......................5

2.2 F#ndaental %ili'ri# %xchange

(ates..........................................................82.) Beha*io#ral %ili'ri# %xchange (ate

.................................................................10

). %+irical , -ontext#al iterat#re re*ie! 12

4. /ethodolog$..........................................15

5. ata Anal$sis.........................................18

5.1 escri+ti*e statistics..........................18

5.2 /#lticollinearit$ and a#tocorrelation

tests.........................................................21

5.) (egression anal$sis............................22

6. iitations F#rther (esearch..............25

.-oncl#sion..............................................2

(eference list.............................................28

Bi'liogra+h$...............................................23

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1. Area and context of research

Glo'ali3ation left its mar4 on the economic interactions of toda). exchange rates (la) an

increasingl) more im(ortant role in the trades 'et,een countries. and thus 4no,ing ho, to (redict them is a valua'le s4ill+ The exchange rate is the (rice of the currenc)5 therefore ,e

must loo4 at the factors that influence the demand and su((l) forces+ 6hat ma4es this

research attractive and challenging is the volatilit) of the exchange rate+ Exchange rates are

im(ortant for 'oth the (rivate sector as ,ell as the (u'lic one+ eo(le. firms. central 'an4s.

commercial 'an4s. cor(orations and governments 'u) foreign currencies. thus the) are

affected ') them+ Kno,ing ho, to (redict the movements of the exchange rate can increase

)our ,ealth. hence cor(orations. 'an4s and different financial institutions tr) to extract (rofits

from the exchange rates movements+ &nother factor ,hich ma4es this to(ic attractive and

com(lex at the same time is the fact that the factors that influence the exchange rate are

diverse+ 7ot onl) economic (henomenon 'ut also social. (olitical and even natural can have

an im(act on exchange rates+ The s(ectrum of factors that influence the exchange rate ma4es

its determination (rocess attracting and challenging+

For centuries the exchange rates have 'een 'ac4ed ') gold. the most recent attem(t to

coordinate exchange rates using gold ha((ened in #0$$ at 8retton 6oods. 7e, 9am(shire+

+ R+ Krugman et! all, !"#!% &ccording to Keith il'eam #00!% this s)stem failed to 'ring

the full em(lo)ment and (rice sta'ilit) (romised and in #02 the (resident of the United

*tates. Richard 7ixon. ended it+ &fter this (eriod as ;ar4 8aim'ridge et! all !"""% suggests

floating exchange rates a((eared+ These flexi'le exchange rates are of t,o t)(es uili'rium exchange rate or FEER and the last section covers

8ehavioural E>uili'rium Exchange Rate or 8EER+ The third cha(ter is the em(irical?

contextual literature revie, on 8EER method ,hich is going to 'e used furthermore to

examine ho, s(ecific determinants influence the exchange rate+ The forth cha(ter gives an

overvie, on the model and data that I am going to use+ The fifth cha(ter anal)3es the data and

(resents the multicollinearit) and autocorrelation tests+ The final (art consists of

limitation?further research cha(ter and conclusions ,hich summari3es the main findings of

this (a(er+

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2. Theoretical Framework

2.1 Purchasing Power Parity

The first section ,ill focus on urchasing o,er arit) % theor) 'ecause this is the

starting (oint for most of the exchange rate determination models+ &'uaf 7+ and + @orion.

#00"% &ccording to Ao(eland. #00$% theor) a((eared first in the sixteenth centur) in

*(ain5 David Ricardo revived it in the nineteenth centur) and a *,edish economist Gustav

Aassel tal4ed a'out it 'et,een 66# and 66!+ The 'uilding 'loc4 for as Krugman

!"#!% argues is the La, of one (rice ,hich states that t,o identical goods from different

countries have the same (rice ,hen ex(ressed in the same currenc). in the a'sence of

trans(ortation costs and trade 'arriers+

iU* B EC? x iE#+#% B EC? B

iU* ?

iE #+!%

i B (rice of good i in U* or Euro(e

EC? B 7ominal Exchange Rate

9aving discussed L// ,e can no, ex(lain theor)+ im(lies that the exchange rate

'et,een ! countries e>uals the ratio of the countries (rice levels+ Krugman. !"#!%

EC? B U* ? E #+2%

7otice: 6e no longer use the su(erscri(t


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Trans(ortation costs. trade tariffs and nontrada'le goods can cause movements in the

exchange rate ,hich are not accounted ') theor)+ 8ecause is maintained through

ar'itrage the a'ove trade im(ediments restrain the ar'itrage (rocess+ This division of the

econom) into ! sectors. traded and nontrada'le goods according to Ao(eland #00$% ma)

further affect the theor)s validit)+ Discre(ancies in (rices for nontrada'le goods 'et,een

countries are not going to 'e eliminated 'ecause ar'itrage cannot 'e used. thus exchange rate

,ill deviate further from levels+

!+ De(arture from free com(etition

Firms ,ith mono(olistic or oligo(olistic (o,er might strengthen the current trade 'arriers5

hence exchange rate levels ,ill not 'e consistent ,ith theor)+ Ao(eland #00$% suggests

that theor) does not ta4e in consideration the ris4 factor+

2+ Differences in consum(tion (atterns and (rice level measurement

&lthough relative eliminates some of the (ro'lems caused ') the differences in the

com(osition of the 'as4ets among countries. it fails to correct the (ro'lems that a((ear ,hen

the (rice of a certain good from the 'as4et changes+ This is the case 'ecause a certain goodmight count for a different share of the 'as4et in countr) & than in countr) 8. also it is ver)

difficult to a((roximate the exact share+

These dra,'ac4s lead to the u33le ,hich refers to the fact although the exchange rate is

highl) volatile in the short-run. the (rocess of converging to the (redicted rate ') model

is ver) slo, 2 to )ears convergence half life%+

>C? B EC? x E% ? U* #+%

&ccording to Krugman !"#!% e>uation #+ ,ill hel( us >uantif) the deviations from +

real ER ,ill e>ual # ,hen relative holds% Krugman. !"#!%

U* B the dollar (rice of an unchanging 'as4et containing the t)(ical ,ee4l) (urchases of U*

households and firms+

E B the euro (rice of an unchanging 'as4et containing the t)(ical ,ee4l) (urchases of

Euro(e households and firms+

Krugman !"#!% argues that a change in the real exchange rate is e>ual to the (ercentage

change in the nominal exchange rate less the differences in inflation 'et,een the domesticand the foreign econom)+

>eC? - >C? %? >C? B J EeC? -EC?% ? EC? - H

eU* - H

eE% #+%

R C - R B EeC? - EC?% ? EC? #+% Krugman. !"#!%

E>uation #+ (lus the interest rate (arit) condition e>uation #+% gives us the e>uation for the

real exchange rate+

R C - R B >eC? - >C? %? >C? M H

eU* - H

eE% #+1%

8ut ,e still have to incor(orate the real interest rate: r e B R - He #+0%+

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r eU* - r eE B R C - HeU*% - R - HeE% #+#"% B r eUS = r

e E + (q

e$/€ - q$/€ )/ q$/€ #+##%

r eU* B r eE ,hen holds%

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2.2 Fundamental Equilirium Exchange !ates

Furthermore. the second section ,ill focus on the Fundamental E>uili'rium Exchange Rates

theor) or FEER+ Fundamental refers to the fact that ,e focus on varia'les and conditions

related to long-run. thus FEER is a model used to calculate the value of the exchange rate

over the medium to long term ;acDonald R+ et! all, '))*%+&ccording to ;acDonald R+ et!

all #001% FEER is defined as the real exchange rate ,hich is consistent ,ith the

macroeconomic 'alance5 therefore ,e must have an internal and external 'alance+ The

internal 'alance is defined as the level of out(ut at ,hich ,e have full em(lo)ment and lo,.

sustaina'le inflation+ The external 'alance is achieved ,hen the trading countries ,hich have

internal 'alance maintain a desired flo, of resources+ The FEER method as ;acDonald R+ et!

all #001% suggested ,ill give the e>uili'rium exchange rate that ,ould 'e reached in Ideal

economic conditions+

The 'asic e>uation of this model is: A& B -K& !+#% ,here A& is the current account and

K& is ca(ital account+ ;acDonald R+ et! all, #001%

FEER as ;acDonald R+ et! all, #001% states loo4s at the determinants of the current account+

The current account is affected ') the domestic Nd% and foreign Nf % aggregate out(ut and ')

the real exchange rate >% ;acDonald R+ et! all, #001%+

A& B '" M '# x > M '! x Nd M '2 x Nf B -K& !+!%

'#O ". '!O". '2" and >. Nd. Nf are set at Long-Run e>uili'rium levels+

From the a'ove e>uation ,e can rearrange the factors and o'tain the FEER+

FEER B -K& - '" - '! x Nd - '2 x Nf % ?'# !+2%

;acDonald R+ et! all, #001% argues that FEER is a method of calculation. thus it does not

contain a theor) of real exchange rate determination+ The main assum(tion is that the real

exchange rate converges over time to FEER 'ut this model does not state ,hich forces ,ill

eliminate the difference 'et,een current ER and FEER ;acDonald R+ et! all, #001%+ In order

to evaluate the current exchange rate

> FEER over evaluated% or > O FEER under evaluated%

6e must first calculate a (roPected A& ,hich is consistent ,ith internal 'alances in the

economies (artici(ating in trade ;acDonald R+ et! all, #001%+ &fter reaching an a((roximateof the A& ,e ,ill com(are it ,ith the K&. FEER ,ill 'e the exchange rate that ,ill ma4e A&

B -K& ;acDonald R+ et! all, #001%+

To reach FEER ,e must follo, 2 ste(s:

- construct a current account model

- estimate the (otential out(ut of the domestic and foreign economies

- estimate the K&

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;acDonald R+ et! all, #001% states that ca(ital account e>uili'rium value e>uals the

difference 'et,een savings and investment at full em(lo)ment level+

-K&% B * - I !+$% B FEER B * - I - '" - '! x Nd - '2 xNf % ? '# !+%

;acDonald R+ et! all, #001% argues that this method has 2 dra,'ac4s:

#+ It is com(licated to estimate the (otential out(ut for the domestic and foreign economies+

!+ Does not incor(orate a theor) of exchange rate determination

2+ Does not assess ho, stoc4 e>uili'rium considerations affect the exchange rate+

2." #eha$ioural Equilirium Exchange !ate

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The third section focuses on the 8ehavioural E>uili'rium Exchange Rate. this is the method

used in this (a(er to examine ho, s(ecific determinants affect the exchange rate+ 8EER

measures the difference 'et,een the current real exchange rate and the estimated value

consistent ,ith fundamentals e>uili'rium R+ ;acDonald , #001%+

&ccording to ;acDonald R+ et! all, #001% 8EER method re>uires an anal)sis of the

fundamental varia'les in the econom)+ This theor) of exchange rate determination

incor(orates ! co-integrated vectors one for long-run and one for short-run5 our interest is in

the com(onents of the long-run vector+

Long-run vector 'uilding 'loc4s: - Terms of trade

- Relative (rice of nontraded to traded goods

- The stoc4 of net foreign assets

- rox) for ris4 (remium

*hort-run vector 'uilding 'loc4: -interest rate differentials

;acDonald R+ et! all, #001%

The fundamental e>uation of this theor) is the follo,ing:

>t B Q#x #t M Q! x !t M ʈ x Tt M Ƹt 2+#%

# B a vector of economic fundamentals that influence the exchange rate in the long-run+

! B a vector of economic fundamentals that affect the exchange rate over the medium term+

Q#.Q! B vector of reduced form coefficients

T B a vector ,hich contains factors that influence exchange rate in the short-run+

B vector of reduced form coefficientsʈ

Ƹt B the distur'ance term

;acDonald R+ et! all, #001%

&s 2+# e>uation suggests the real exchange rate is ex(lained ') a set of fundamentals #. !

(lus a grou( of varia'les that influence it in the short-run T and the distur'ance term Ƹt+

8EER does not onl) anal)se ,hat determines the exchange rate 'ut also com(are it ,ith the

e>uili'rium value. in order to do this ,e need to introduce the current misalignment cm t% and

the total misalignment tmt%+

;acDonald R+ et! all #001% states that the current misalignment is the difference 'et,een the

actual real exchange rate and the real exchange rate given ') the current values of all the

economic fundamental+

Aurrent exchange rate: >t B 8# x #t M 8! x !t 2+!%

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cmt B >t - >t B >t - 8# x #t M 8! x !t B ʈ x Tt M Ƹt 2+2% from e>uation 2+#%

The total misalignment is defined 'ecause the current values of the fundamentals might not 'e

at the desired level+ ;acDonald R+ et! all #001% states that the total misalignment is given ')

the difference 'et,een the current real exchange rate and the exchange rate o'tained ,hen the

fundamentals are at the desired levels+

tmt B >t - 8# x #t M 8! x !t2+$%

The 'ar at the 'ottom re(resents that the varia'les are at long-run e>uili'rium%

tmt B >t - >t% M J8# #t - #t% M 8! !t - !t% 2+%

The first 'rac4ets re(resent the cmt and the second set of 'rac4ets sho, the current deviation

of the fundamentals from their long-run values+

From e>uation 2+2 B tmt B ʈ x Tt M Ƹt M J8# #t - #t% M 8! !t - !t% 2+%

Thus the exchange rate is ex(lained through: transitor) factors. random distur'ances and

deviations of fundamentals from long-run values+

;acDonald R+ et! all #001% argues that 8EER model is more com(lete than FEER 'ecause

can ex(lain c)clical movements in the exchange rate. also 8EERs varia'les included in the

vectors for short and long-run can 'e mani(ulated and changed. therefore the researcher can

include the set of factors that he ,ants to test+

". Em%irical & Contextual 'iterature re$iew

Ronald ;acDonald !""$% (rovides evidence that 8EER is 'etter than com(eting a((roachesin terms of tracta'ilit) and trans(arenc)+ 9is starting (oint is (urchasing (o,er (arit) and thefailure of this theor) due to random ,al4+

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Ronald ;acDonald !""$% states that real exchange rate de(ends on the actual rate and theinterest rate differentials+

>tSB >tM r t r t%

>t B actual rate influenced ') the follo,ing fundamentals%

Varia'les:

• The ratio of net foreign assets to GD nfa% is affected ') demogra(hics and

structural fiscal 'alances%

• La'our (roductivit) relative to trading (artners l(rodt%

• /ut(ut ga( relative to out(ut ga( of trading (artners ga(d%

• Terms of trade ltot%

• The ratio of total trade to GD ltotta%

• Log of (ro(ert) (rice l(ro(%

• Log of (rivate and government consum(tion l(con% lfcon%

>t B fnfa JM. l(rod JM. ga(d JM. ltot JM. ltotta J-. l(ro( JM. l(con JM. lfcon JM%

To conclude. this stud) gives a set of varia'les that I ,ill assess in m) (a(er and also gives (redictions of their relationshi( ,ith the exchange rate the signs in the 'rac4ets%+

;acDonald and reethi4e Dias !""% uses the 'ehaviour e>uili'rium exchange rates 8EER%of Alar4 and ;acDonald #000% on a mix of #" develo(ed and develo(ing countries+ This

(a(er gives an insight on ho, to 'uild the 8EER e>uation. ;acDonald and reethi4e Dias!""% use the follo,ing varia'les:

• net ex(orts as a (ro(ortion of GD

• real interest rate differential

• terms of trade differential

• GD (er ca(ita differential

;acDonald et all! !""% also suggests another reason on ,h) ,e need the calculate theexchange rate. the) argues that central Euro(ean countries that recentl) 'ecame mem'ers ofthe EU need to 4no, the a((ro(riate exchange rate value for entr) into the EU+

8EER a((roach is a general method of modelling e>uili'rium exchange rates. ;acDonald etall +!""% argues that the core element of most 8EER a((lications is the re>uirement that the

current account should 'e 3ero in e>uili'rium+ 8EER method has the (otential to include allthe fundamental movements of exchange rates according to this (a(er+

The structure of the e>uation for the actual real ER is the 'asic one for 8EER. 2 vectors onecontaining short-run factors. one for medium term and the third one for long-run varia'les

(lus the random error+

>t B Q#x #t M Q! x !t M ʈ x Tt M Ƹt

This (a(er also covers the current misalignment and the total misalignment+This Pournal is (articular useful for me 'ecause not onl) gives ste( ') ste( instruction 'ut alsosho, the statistic ,hich can later 'e com(ared ,ith m) results+

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Drine I+ et! all !""2%. (resents ho, a set of varia'les affect the real exchange rate in the longrun+ 9is set of factors are the follo,ing:

- domestic investment- the share of (u'lic s(ending in the GD- trade (olic)- GD (er ca(ita- foreign direct investment flo,s

- terms of trade

Drine I+ et! all !""2% argues that onl) real varia'les can influence the exchange rate

e>uili'rium in the long-run+ &ccording to his (a(er ') reducing the tariffs im(osed on im(orts

the exchange rate is going to de(reciate+ olicies that aim that are going to increase the

income and (art of that raise is going to 'e used to consume more im(orts. thus causing a

de(reciation+ Drine I+ et! all !""2% ex(lains that an increase in net ca(ital flo,s or in net

foreign assets earnings ,ill a((reciate the exchange rate also according to Ed,ards #010% the

same effect ,ill have an investment in ex(orts or non-trada'le goods+ Drine I+ et! all !""2%

ending remar4 is that terms of trade. ca(ital flo,s and GD (er ca(ita are (ositivel) related to

long-run real exchange rate. ,hile domestic investment and the degree of o(enness of the

econom) are negativel) related+

@orge Aarrera !""1% (rovides in his (a(er a set of factors that influence the real exchange rate

and gives (redictions on the nature of influence. (ositive or negative+ The real exchange rate

according to @orge Aarrera !""1% is the relative (rice of the nontraded to traded goods that is

consistent ,ith internal and external 'alance+ 9is (a(er covers as(ects li4e government

s(ending. degree of o(enness. terms of trade. ca(ital flo,s and net foreign assets @orge

Aarrera. !""1%+

Furthermore. I ,ill summari3e his findings on the a'ove varia'les+ The exchange rate ,ill

a((reciate if government s(ending increases5 according to his stud) the increase in s(ending

,ill cause an increase in (rices. thus in the exchange rate as ,ell @orge Aarrera. !""1%+ The

degree of o(enness affects the fluctuations in the exchange rate+ @orge Aarrera. !""1 argues

that the higher the degree of o(enness the smaller are the fluctuations. also he o'served that

(olicies to raise the level of o(enness ,ill de(reciate the real exchange rate+

@orge Aarrera !""1% states that an im(rovement in terms of trade ,ill a((reciate the real

exchange rate+ &lso he highlights the (ositive relationshi( 'et,een ca(ital flo,s and real

exchange rate. as foreign investment raises the real exchange rate a((reciates @orge Aarrera.

!""1%+ This is the result of the increase in demand for our currenc)+

&s I highlighted earlier 8EER a((roach is (referred ') man) researchers 'ecause )ou can

ada(t it and include onl) the factors that )ou ,ish to anal)se+ Furthermore. I ,ill give a 'rief

descri(tion of Faru>eeSs (a(er+ This (a(er (rovides a 'etter overvie, of the 8EER method

and also sho,s a good (ath on ho, to reach a long-run real exchange rate e>uation+ Faru>ee

and *tein #00% 'oth start ,ith the 'alance of (a)ments e>uation:

A& B K& $+#%

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The) argue that (roductivit) and thrift affect the ca(ital account and the exchange rate

through the current account. also this method incor(orates the stoc4 e>uili'rium conditions+

The current account is de(endent on the exchange rate. exogenous varia'le and the interest

rate received? (aid on a countr)s net foreign asset? de't (osition F% Faru>ee. #00%+

A& B c x > M W M r x F cO " $+!%

> B exchange rate

W B exogenous varia'les

r B domestic interest rate

The desired net ca(ital flo, is ex(ressed ') the follo,ing e>uation+

K&d B d r - r % M f Fd - F% dO". f" $+2%

r B ,orld real interest rate

Fd Btarget level of net foreign assets

From e>uation $+! and $+2 ,e can get the e>uili'rium 'alance of (a)ment e>uation ,hich

im(lies that desired excess of income over s(ending e>uals desired net variations in claims on

foreigners+ Faru>ee. #00%

c x > M W Mr x F B d r-r % M f Fd - F% $+$+%

Faru>ee #00% argues that the real exchange rate is a function of the factors that influence the

current and ca(ital account5 he also does not focus on internal and external 'alance+ From his

(oint of vie, the exogenous varia'les ,hich influence the current account are (roductivit)

gro,th differentials. terms of trade and the relative (rice of non-traded goods+

9is method gives a trend not Pust an e>uili'rium value and em(hasi3es one issue ,ith 8EER

theor)+ &ccording to Faru>ee #00% it is un4no,n if the difference 'et,een the estimated

8EER and the actual exchange rate is true misalignment or s(ecification error not

incor(orating all the fundamentals that influence ER%+ Faru>ee. #00%

(. )ethodology

To stud) the determinants of the real exchange rate in the long-run for United Kingdom I ,ill

use a time series data set+ I ,ill get annual data from #01" until !"#2 from /EAD *tatistics

and I;F Data and *tatistics. thus giving me a sam(le si3e of 2$+ The method used to anal)3e

the determinants of the real exchange rate in the LR is a *** /L* regression+ &lthough I am

a,are that a Aointegrated V&R model is more suita'le. this is too advanced for this (a(er+

;ichael 9auser. !"#$% The (artner countr) for the UK econom) ,ill 'e the U*& econom)+

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Furthermore. I ,ill anal)3e the advantages and disadvantages of this t)(e of test+ &ccording

to *amuel Aameron !""% the /L* regression uses data ver) efficientl)5 ,ith onl) a sam(le

si3e of 2" one can o'tain statistical significant tests+ &nother advantage of this method is that

the results are eas) to anal)3e and inter(ret+ /ne of the dra,'ac4s of this method is that it

onl) anal)3es if there is a linear relationshi( 'et,een the de(endent and inde(endent

varia'les. also it has a high sensi'ilit) to outliers+ &nother issue is that data must 'e

inde(endent+ *amuel Aameron. !""%

9aving inde(endent varia'les and the de(endent varia'le ex(ressed in (ercentages I did not

had to a((l) natural logarithm to eliminate issues ,hich might a((ear due to different units of

measure+

Regression model specification

ER B 8" M 8#TotInv M 8! Inflation M 82 Unem(l M 8$ ToTdiff M 8 GDdiff M 8 rdiff M X

Dependent variales!

Real effective Exchange rate ER%

"ndependent variales!

#+ Total Investment as a (ercentage of GD TotInv%!+ Inflation Inflation%2+ Unem(lo)ment as a (ercentage of la'our force Unem(l%$+ Terms of Trade differential ToTdiff%+ GD (er ca(ita differential GDdiff%+ #"-)ear Government 'onds real interest rate differential rdiff%

# priori sign epectation!

8! 82O"8# 8$ 8 8 "

+ariale name Unit of measurement Unit of time Source

Total Investment as a

(ercentage of GDTotInv%

er cent &nnual I;F Data and

*tatistics

Inflation Inflation% er cent &nnual I;F Data and

*tatistics

Unem(lo)ment as a

(ercentage of la'our

force Unem(l%


*tatistics

Terms of trade

differential ToTdiff%

er cent &nnual /EAD *tatistics

GD (er ca(ita

differential

GDdiff%

Aurrent U*C &nnual /EAD *tatistics

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#"-)ear Government

'onds interest real

rate differential

rdiff%

er cent &nnual /EAD *tatistics

Real effective

Exchange rate ER%


*tatistics

I ,ill tr) to accuratel) descri'e the 'ehaviour of the exchange rate in the long-run ,ith all

these varia'les+ The aim of the dissertation is to construct a model ,hich can (redict the real

exchange rate in the long-run ta4ing into account a variet) of determinants+ Furthermore I ,ill

ex(lain the reasoning 'ehind m) chosen varia'les+ Due to multicolinearit) (ro'lems (u'lic

de't and current account 'alance had to 'e removed+

Real effective Ec%ange rate (ER)

The real effective exchange rate ER% is m) de(endent varia'le and is ex(ressed in (ercentage

changes ,ith !"" as 'ase )ear+ The real effective exchange rate is adPusted for inflation and

is e>ual to the nominal effective exchange rate divided ') the (rice index+

&otal "nvestment as a percentage of 'D (&ot"nv)

The first inde(endent varia'le is total investment as a (ercentage of GD+ &ccording to

Ronald ;acDonald !""$% this varia'le is an exchange rate determinant and is (ositivel)

related to the exchange rate+ If the government increases s(ending this ,ill eventuall)

increase interest rates. thus ,ill ma4e domestic de(osits more attractive to foreigners+ &

(otential issue of this varia'le is the fact that it does not sho, the actual investment figure

'ecause is ex(ressed in (ercentages of GD+

"nflation ("nflation)

The second varia'le is inflation. according to I;F Data and *tatistics !"#$% it reflects the

annual changes in the consumer (rice index or more s(ecificall) the changes in the cost of the

index 'as4et of goods and services for the average consumer+ &ccording to @ason Van 8ergen

!"#"% inflation ma4es a currenc) ris4ier. thus reducing the demand for it+ &lso inflation

increases the (rice of ex(orts5 hence foreign consumers ,ill decrease the demand+

Unemploment as a percentage of lao*r force (Unempl)

The third varia'le reflects the domestic unem(lo)ment+ ;acDonald R+ et! all #001% suggest

this varia'le as 'eing (art of the fundamental vector+ &ccording to economic theor)

unem(lo)ment affect man) varia'les from the econom). hence m) desire to see its effects on

the exchange rate+

&erms of trade differential (&o&diff)

The main issue ,hich I immediatel) encountered ,ith this varia'les ,as the lac4 of data. thus

I ,as forced to calculate the terms of trade for 'oth UK and U*&+ I divided the value ofex(orts ') the value of im(orts for 'oth economies5 to o'tain a (ercentage li4e value I

UB:11005648 Page 16


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multi(lied the result ') #""+ @orge Aarrera !""1% sustain that terms of trade are (ositivel)

related to the exchange rate+ To maintain this relationshi( I su'tracted from U*& terms of

trade the UK terms of trade. thus an increase in UKSs terms of trade is translated into an

increase in ToTdiff+

'D per capita differential ('Ddiff)

&ccording to I;F Data and *tatistics !"#$% GD is the sum of gross value added ') all

resident (roducers in the econom) (lus (roduct taxes minus su'sidies+ GD (er ca(ita iso'tained ') dividing the GD ,ith the mid)ear (o(ulation figure+ To maintain the (ositive

relationshi( o'served ') ;acDonald et! all !""% I su'tracted from U*& GD (er ca(ita the

GD (er ca(ita from UK. hence an increase in UK GD (er ca(ita ceteris (ari'us ,ill

translate into an increase in GDdiff+

,-ear 'overnment onds real interest rate differential (rdiff)

The last varia'le is the #"-)ear Government 'onds real interest rate differential+ This varia'le

is sustained 'oth ') out theoretical section and the em(irical one+ @ason Van 8ergen !"#"%

argues that ,hen the interest rate raises domestic de(osits 'ecome more attractive. hence this,ill ma4e the exchange rate stronger+ From the (artner econom) U*&% interest rate I

su'tracted the UK interest rate. thus maintaining the ex(ected (ositive relationshi( of rdiff

,ith the exchange rate+

*. +ata Analysis

The Data anal)sis is divided into 2 sections+ The first section ex(lores the descri(tive statistics

of our data+ The second section tests for multicollinearit) and autocorrelation and the final

section focuses on the regression results+

*.1 +escri%ti$e statistics

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In the first section of the anal)sis I ,ill focus on the inter(retation of the data or descri(tive

statistics+ The need of constructing a se(arate line chart for GD (er ca(ita differential

a((eared due to the maPor difference 'et,een the values of this varia'le and the values of the

rest+ &ll varia'les have a sam(le si3e 7% of 2$ as can 'e seen in Fig+ 2 Descri(tive

statistics% +

The first varia'le ,e focus on is total investment as a (ercentage of GD. the mean in this

case is a((roximatel) #+2$ and the standard deviation is #+! ,hich suggests that the values

are not so s(read out+ 6e o'serve ! maPor s(i4es in the chart. a maximum of !#+00 in #010

and a minimum of #$+" in !""0+ &(art from those ! s(i4es the total investment as a

(ercentage of GD is sta'le at a #+2$Y (er )ear for the (eriod #01"-!"#2+ The rise in total

investment in #010 is (rior to the #00"-#00# UK inflation related recession. hence after the

recession started ,e can see a -Y dro( in the total investment+ &lso ,e o'serve the same

'ehaviour in the case of !"" recession+

The second varia'le is inflation. ,hich is re(resented ') the green line+ The standard

deviation is 2+2! ,hich is higher than in the (revious case suggesting a 'igger s(read of the

values+ 6e o'serve a minimum of "+1Y in !""" and a maximum of #+1$ in #01" during theoil (rice crisis+ &nother interesting o'servation is the difference in inflation rate 'et,een

#01"-#01#. #00"-#00# recessions and !"" recession+ &ccording to this chart the !""

recession is softer than the others in terms of inflation+ The mean over this (eriod is 2+0Y

,hich is higher than the !Y inflation o'Pective+ 9o,ever this o'Pective has 'een met from

#00$ until !"" according to Fig+ #+

The third varia'le anal)3ed is unem(lo)ment ,hich has a standard deviation of !+#0 and a

mean of +1Y+ In this case the maximum. ##+Y is recorded in #01$ and the minimum of

$+Y is re(orted in !""$+ From Fig+ # ,e can see a negative relationshi( 'et,een total

unem(lo)ment and total investment+ 6hen total investment decreases in (eriods of recession#01"-#01#. #00"-#00# and !""-!""1 total unem(lo)ment increases+ 6e also o'serve that

during #00-!"" 'oth inflation !Y% and unem(lo)ment Y% ,ere sta'le+

The forth varia'le is terms of trade differential+ In this case the standard deviation is + and

the mean -#+1+ The minimum of -2!+20 is achieved in #01 and the maximum of -#+$! is

re(orted in #010+ For this (articular varia'le due to the ,a) it ,as constructed the minimum

is disguised in maximum and vice-versa+ The minimum value in fact re(resents the highest

difference in terms of trade 'et,een UK and U*&. ,hile the maximum re(resents the lo,est

difference+

The fifth varia'le is #"-)ears government 'onds real interest rate differential+ This varia'le

has the lo,ers standard deviation. onl) "+01 and a mean of -"++ The maximum is #+2# and is

o'served in #01$. ,hile the minimum is -2+! and is registered in #00"+ 6e o'serve an

inverse relationshi( 'et,een terms of trade differential and interest rate differential+ In #01$-

#01 terms of trade differential records its minimum value ,hile interest rate differential

records its maximum value+ This relationshi( is maintained in #010-#00" ,hen terms of trade

differential records its maximum value ,hile interest rate differential records its minimum

value+

The last varia'le is GD (er ca(ita differential ,ith the largest standard deviation of !+0and a mean of 01+!+ The maximum for this varia'le is recorded in !"#! and is e>ual to

UB:11005648 Page 18


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#!1!1+0 and the minimum is o'served in !"" and e>uals #$0+1+ &s ,e can see in Fig+ !

the GD (er ca(ita differential increases during times of glo'al recession. suggesting that the

UK econom) is much more sensi'le to recessions than the U*& econom)+

40

)0

20

10

0

10

20

)0

Total n*estent

nation

Une+lo$ent

Ters of Trade i7erential

nterest rate di7erential 10

$ears 9o*. Bonds

0

2000

4000

6000

8000

10000

12000

14000

United ingdom

9P +er ca+ita i7erential

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N Minimum Maximum Mean Std. Deviation

TotInv 34 14.0710 21.9940 17.336059 1.7189004

Inflation 34 .7850 16.8490 3.958971 3.3202450

nem!l 34 4.7500 11.7500 7.865059 2.1916855

ToTdiff 34 "32.3928 "1.4259 "16.581301 7.5629147

#D$diff 34 1459.8536 12828.9611 7968.264362 2656.9752778

%diff 34 "3.25 1.31 ".7524 .98786

&alid N 'li(t)i(e* 34

Fig+ 2

*.2 )ulticollinearity and autocorrelation tests

The second section ,ill test for multicollinearit) and autocorrelation+ In order to asses if thereis an) linear relationshi( 'et,een the inde(endent varia'les I ,ill use the variance inflation

factor VIF%+ Figure $ sho,s that VIF values for each inde(endent varia'le are 'et,een # and

! ,hich is 'elo, #". the esta'lish threshold value+ This suggests that ,e do not face an)

multicollinearit) issues+ Furthermore. another (ro'lem for time-series data is serial correlation

or autocorrelation+ To test if the si3e of the residual for one case has no effect on the si3e of

the residual for the follo,ing case ,e im(lement the Dur'in-6atson statistic+ In our case the

value is #+0 ,hich is close to ! indicating that our model does not have autocorrelation issues+

Dur'in-6atson B #+0"

Varia'les Aollinearit) *tatistics - VIF

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Total investment as a (ercentage of GD #+#

Inflation #+1"#

Unem(lo)ment (ercentage of total

unem(lo)ment

#+22"

Terms of Trade differential #+200

GD (er ca(ita differential #+#!

#"-)ear Government 8onds interest rate

differential

#+!

Fig+ $

*." !egression analysis

De (endent varia'le: ER Estimated coefficient (-value

8" constant% ##

TotInv -"+"#" 7ot significant

"+"!#%

"+01$

Inflation "+1#0

!+#%

"+"#"

Unem(l -!+!#"

+20%

"+""#

ToTdiff -"+" 7ot significant

"+%

"+#1

GDdiff -"+""#

2+##%

"+""$

rdiff 2+

2+2"%

"+""#

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negative relationshi( 'et,een the real effective exchange rate and the total investment as a

(ercentage of GD+ Loo4ing at the si3e of the coefficient ,hich e>uals -"+"#" ,e can

conclude that a # unit change in total investment as a (ercentage of GD ,ill result in -"+"#"

units change in the real effective exchange rate+ Lastl). the (-value is "+01$ ,hich 'igger than

"+" the critical value suggesting that this varia'le is not significant for 0Y confidence level+

In the case of Inflation Inflation% the (redicted relationshi( ,as negative according to the

em(irical section 'ut our regression gave a (ositive relationshi(+ The si3e of the coefficient is

"+1#0 meaning that a # unit change in inflation ,ill create a "+1#0 units change in the real

effective exchange rate+ The (-value is "+"#" ,hich is e>ual to the critical value for the 00Y

confidence5 hence inflation is significant at 00Y confidence level+

The third varia'le Unemployment as a percentage of labour force Unem(l% has a negative

sign ,hich is in accordance ,ith our earlier (rediction+ The si3e of the coefficient is -!+!#"

,hich im(lies that a # unit change in unem(lo)ment ,ill result in -!+!#" units change in the

real effective exchange rate+ 8ecause the (-value is "+""# ,hich is 'elo, "+"# the critical

value for 00Y confidence level ,e conclude that this varia'le is significant+

The forth varia'le Terms of trade differential ToTdiff% had a (ositive sign (redicted5

anal)3ing the results ,e o'serve that the actual sign in negative+ The si3e of the coefficient is

-"+" im(l)ing that a # unit change in terms of trade differential ,ill cause a -"+" units

change in the real effective exchange rate+ In this case the (-value is "+#1 ,hich is higher

than "+". this suggests that this varia'le is not significant at the 0Y confidence level+

The fifth varia'le or GDP per capita differential GDdiff% has a negative sign and is not in

accordance ,ith the (redicted sign+ This im(lies that for the UK econom) an increase in GD

(er ca(ita ,ill translate in an increased demand for im(orts. thus ma4ing the exchange rate

,ea4er+ The si3e of the coefficient is -"+""# meaning that a # unit change in GD (er ca(itadifferential ,ill cause a -"+""# units change in the real effective exchange rate+ The (-value is

"+""$ ,hich is lo,er than "+"#. hence this varia'le is significant at 00Y confidence level+

The last varia'le. Interest rate differential rdiff% ex(resses a (ositive relationshi( ,ith the

de(endent varia'le ,hich ma4es our (rediction valid+ The si3e of the coefficient is 2+5 this

im(lies that a # unit change in interest rate differential ,ill translate into a 2+ units change

in the de(endent varia'le+ The (-value is e>ual to "+""# ma4ing this varia'le significant at

00Y confidence level+

/ther ! values ,hich need to 'e anal)3ed are the R s>uared statistic and the F statistic+ R

s>uared statistic ex(lains the variation of N around its mean Aameron. !""%+ In our case R

s>uared statistic is e>ual to "+. this means that +Y of the variation in the real effective

exchange rate is ex(lained ') our varia'les. thus our model has a good fit+ The F statistic

measures the significance of the ,hole model and is e>ual to #$+!+ 8) com(aring our (-

value ,ith the critical (-value ,e can anal)3e if our model is significant or not+ In our case (-

value is e>ual to "+""# ma4ing our model significant at 00Y confidence level+ The t,o values

and ! from ,ithin the 'rac4ets re(resent the degree of freedom and the num'er of

varia'les+

KB

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DfB 7-K-#B2$--#B!

,. 'imitations - Further !esearch

This section ,ill focus on the limitations of the model and ,ill suggest further research

h)(otheses+

The first limitation of this model is the use of a sim(le /L* regression ,hich onl) allo,s too'serve linear relationshi(s+ Using this t)(e of test ,ith varia'les ,hich do not have a linear

relationshi( ,ith the real effective exchange rate ,ill not (rovide credi'le results+ The t,o

insignificant varia'les. total investment as a (ercentage of GD and terms of trade differential

might 'e determinants of our de(endent varia'le 'ut 'ecause their relationshi( is not linear

the /L* regression results (resents them as insignificant+ &ccording to the em(irical section

terms of trade differential should 'e a maPor determinant of the real effective exchange rate

'ut our model fails to o'serve this+ Furthermore. another (ossi'le cause for this could 'e the

sam(le si3e5 although it is higher than 2". the minimum re>uired. *amuel Aameron !""%

argues that ') increasing the sam(le si3e our regression 'ecomes more sta'le and less

sensi'le to outliers+

UB:11005648 Page 24


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&s o'served a'ove the signs of some of the inde(endent varia'les are not the same as the ones

(redicted in the methodolog) section+ This could 'e ex(lained through the differences in the

economies anal)3ed+ 8ecause each econom) is uni>ue. the relationshi(s o'served on one

econom) cannot 'e ta4en as #""Y certain for all economies+

Further develo(ments of the model can 'e made ') increasing the sam(le si3e. changing the

collection interval i+e+ semi-annual. >uarterl) and ') anal)3ing multi(le economies and

com(aring the results+ &lso the regression model can 'e change from linear to Log-linear.

Linear-log or dou'le-log+

S*ggested models!

1inear

ER B 8" M 8#TotInv M 8! Inflation M 82 Unem(l M 8$ ToTdiff M 8 GDdiff M 8 rdiff M X

1og2linear

LnER B 8" M 8#TotInv M 8! Inflation M 82 Unem(l M 8$ ToTdiff M 8 GDdiff M 8 rdiff M X

1inear2log

ER B 8" M 8# LnTotInv M 8! LnInflation M 82 LnUnem(l M 8$ LnToTdiff M 8 LnGDdiff M

8 Lnrdiff M X

3oule log

LnER B 8" M 8# LnTotInv M 8! LnInflation M 82 LnUnem(l M 8$ LnToTdiff M 8 LnGDdiff

M 8 Lnrdiff M X

&ccording to ;ichael 9auser !"#$% more advanced tests such as Aointegrated V&R models

are more suita'le to anal)3e the determinants of the real effective exchange rate+ This t)(e of

anal)sis can 'e incor(orated in future (a(ers to achieve a more com(lex and com(lete

inter(retation of the relationshi( 'et,een the inde(endent varia'les and the de(endent

varia'le+ Lastl). as s(ecified in the methodolog) section (u'lic de't and current account

'alance ,ere ta4en out due to multicollinearit) (ro'lems. these varia'les can 'e added in

V&R models ,ithout facing an) multicollinearit) issues+

UB:11005648 Page 25


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.Conclusion

To conclude. this (a(er focused on the determinants of the real effective exchange rate+ The

five main cha(ters are: the Theoretical Frame,or4. the Em(irical Literature revie,.

;ethodolog). Data &nal)sis and Further Research?Limitations+

The Theoretical Frame,or4 is divided into 2 sections. the first section anal)3ed the theor) 'ecause as &'uaf 7+ &nd + @orion #00"% argued this is the starting (oint for ever)

exchange rate determination model+ The La, of /ne rice L//% is discussed and

translated into a'solute and relative + Furthermore. due to the dra,'ac4s of the theor)

and its non realistic assum(tions ,e a'andon this sim(listic theor) ,hich served its (ur(ose

of giving us a greater understanding of the exchange rate determination+ The second section of

the Theoretical Frame,or4 loo4s at the Fundamental E>uili'rium Exchange Rates theor)+

;acDonald R+ et! all #001% sustains that FEER does not incor(orate a theor) of exchange

rate determination. in addition to this dra,'ac4 the estimation of the (otential out(ut for 'oth

the domestic and foreign econom) might (rove to 'e too com(licated. thus a 'etter method

has to 'e used to anal)3e the determinants of the ER+ The final section introduces the

UB:11005648 Page 26


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8ehavioural E>uili'rium Exchange Rate or 8EER ,hich according to ;acDonald R+ et! all

#001% is a more com(lete model for exchange rate determination+

The Em(irical? Aontextual Literature revie, focused on Pournals ,hich used . FEER and

8EER as methods of exchange rate determination+ These Pournals gave me an insight into the

advantages and dra,'ac4s of each theor) and also hel(ed me to form m) (redictions for each

inde(endent varia'le used+

;ethodolog) gave an overvie, of m) inde(endent varia'les: Total investment as a (ercentage of GD. Inflation. Unem(lo)ment as a (ercentage of total la'our force. Terms of

trade differential. GD (er ca(ita differential and #"-)ears Government 'onds interest rate

differential and (resented the advantages and disadvantages of the /L* regression+

The Data anal)sis cha(ter covers descri(tive statistics. multicollinearit) test. autocorrelation

test and the regression anal)sis+ In the descri(tive statistics ,e o'serve an inverse relationshi(

'et,een total investment and unem(lo)ment+ Furthermore. our model (asses the

multicollinearit) and autocorrelation tests 'ut the u'lic De't and Aurrent &ccount 8alance

varia'les have to 'e removed+ The final section argues that Total Investment as a (ercentage

of GD and Terms of Trade differentials are insignificant ,hile Inflation. Unem(lo)ment.

GD differentials and interest rate differentials are significant at 00Y confidence level+

The final cha(ter. Limitations and Further research de'ates (ossi'le reasons for the

insignificance of the Total investment as a (ercentage of GD and Terms of Trade

differentials and suggests further im(rovements and research h)(otheses+

!eference list

&'dalrahman et all! !""0%+ 4he 3eterminants of Exchange rate on Asean2#

countries5 An E6idence on Purchasing 7ower 7arity! &vaila'le at:

htt(:??(a(ers+ssrn+com+e3(rox)+'rad+ac+u4?sol2?(a(ers+cfmZa'stract[idB#!11$

J&ccessed: #$ &(ril !"#2

&nders 8ergvall !""!%+ 8hat 3etermines Real Exchange Rates9 4he :ordic

countries+ &vaila'le at: htt+:,,!!!.di*a

+ortal.org,sash,get,di*a2:123240,FUT%;T01.+df J&ccessed:

##+##+!"#2

&n,ar *hai4h and Rania &ntono(oulos #001%+ Ex7laining 1ong 4erm Exchange rate

Beha6ior in the United States and ;a7an+ &vaila'le at:

htt+:,,!!!.le*$instit#te.org,+#'s,!+250.+df J&ccessed: #"+##+!"#2

• 8aim'ridge ;+ !"""%+ 4he im7act of the Euro5 3eating Britain


28/30

htt+:,,+ocaris!eat.#dl.#ich.ed#,'itstrea,handle,202.42,)3868,

!+48).+df


29/30

7iso &'uaf and hili((e @orion #00"%+ Purchasing Power Parity in the 1ong Run!

&vaila'le at:

htt+:,,ne!doc.ncc#.ed#.t!,teas$lla'#s,10160)50)0,+++Ha?H?f30.+

df J&ccessed: ##+##+!"#2

/EAD *tatistics !"#$%+ &vaila'le at: htt(:??stats+oecd+org? J&ccessed: #+"2+!"#$

eter 8+ Alar4 and Ronald ;acDonald #001%+ Exchange Rates and Economic

Fundamentals5 A $ethodological com7arison of BEERs and FEERs+ &vaila'le at:

htt+:,,!!!.if.org,external,+#'s,ft,!+,!+386.+df J&ccessed:##+##+!"#2

Ronald ;acDonald #00%+ 8hat 3etermines Real Exchange Rates9 4he 1ong and

Short of It! &vaila'le at:

htt+:,,!!!.if.org,external,+#'s,ft,!+,!+321.+df J&ccessed:

#!+##+!"#2

Ronald ;acDonald !""$%+ 4he 1ong2Run Real effecti6e exchange rate of Singa7ore5

A Beha6ioural a77roach+ &vaila'le at:

htt+:,,!!!.as.go*.sg,I,edia,reso#rce,+#'lications,sta7H+a+ers,D

ta7Pa+er)6(eer/conald.+df J&ccessed: #"+##+!"#2

Ronald ;acDonald and reethi4e Dias !""%+ Beha6ioural e@uilirium exchange

rate estimates and im7lied exchange rate adustments for ten countries! &vaila'le at:

htt+:,,!!!.iie.co,+#'lications,+',+'04,acdonald.+df JAccessed:

#"+##+!"#2

#iliogra%hy

•

&nders 8ergvall !""!%+ 8hat 3etermines Real Exchange Rates9 4he :ordic=ountries! &vaila'le at: htt(:??,,,+diva-

(ortal+org?smash?get?diva!:#!0!$"?FULLTEWT"#+(df J&ccessed: #!+##+!"#2

• &n,ar ;+ *hai4h and Rania &ntono(oulos #001%+ Ex7laining 1ong2term Exchange

Rate Beha6ior in the United States and ;a7an! &vaila'le at:

htt(:??(a(ers+ssrn+com?sol2?(a(ers+cfmZa'stract[idB#2!"1 J&ccessed: #+"2+!"#$

• Frederic. *+ ;ish4in !"#!%+ $acroeconomics5 Policy and Practice+ United Kingdom:

earson Education Limited+

• 9siu-Ling 6u #00%+ 4esting for the Fundamental 3eterminants of the 1ong2Run

Real Exchange Rate5 4he case of 4aiwan! &vaila'le at:

htt(:??,,,+n'er+org?(a(ers?,1 J&ccessed: #!+##+!"#2

• Kees KoediP4 #00"%+ 8hat 3o we now aout the 1ong2Run Real Exchange rate9+

&vaila'le at:

htt(:??research+stlouisfed+org?(u'lications?revie,?0"?"#?LongRun[@an[Fe'#00"+(df

J&ccessed: #+"2+!"#$

• Kenneth &+ Froot et! all #00%+ Pers7ecti6es on PPP and 1ong2Run Real Exchange

Rates! &vaila'le at: htt(:??,,,+n'er+org?(a(ers?,$0! J&ccessed: #!+##+!"#2

UB:11005648 Page 23

http://newdoc.nccu.edu.tw/teasyllabus/107160357030/ppp_aj_jf90.pdfhttp://newdoc.nccu.edu.tw/teasyllabus/107160357030/ppp_aj_jf90.pdfhttp://stats.oecd.org/http://www.imf.org/external/pubs/ft/wp/wp9867.pdfhttp://www.imf.org/external/pubs/ft/wp/wp9721.pdfhttp://www.mas.gov.sg/~/media/resource/publications/staff_papers/StaffPaper36ReerMcDonald.pdfhttp://www.mas.gov.sg/~/media/resource/publications/staff_papers/StaffPaper36ReerMcDonald.pdfhttp://www.iie.com/publications/pb/pb07-4/macdonald.pdfhttp://www.diva-portal.org/smash/get/diva2:129240/FULLTEXT01.pdfhttp://www.diva-portal.org/smash/get/diva2:129240/FULLTEXT01.pdfhttp://www.diva-portal.org/smash/get/diva2:129240/FULLTEXT01.pdfhttp://papers.ssrn.com/sol3/papers.cfm?abstract_id=132508http://papers.ssrn.com/sol3/papers.cfm?abstract_id=132508http://www.nber.org/papers/w5787http://research.stlouisfed.org/publications/review/90/01/LongRun_Jan_Feb1990.pdfhttp://research.stlouisfed.org/publications/review/90/01/LongRun_Jan_Feb1990.pdfhttp://www.nber.org/papers/w4952http://newdoc.nccu.edu.tw/teasyllabus/107160357030/ppp_aj_jf90.pdfhttp://newdoc.nccu.edu.tw/teasyllabus/107160357030/ppp_aj_jf90.pdfhttp://stats.oecd.org/http://www.imf.org/external/pubs/ft/wp/wp9867.pdfhttp://www.imf.org/external/pubs/ft/wp/wp9721.pdfhttp://www.mas.gov.sg/~/media/resource/publications/staff_papers/StaffPaper36ReerMcDonald.pdfhttp://www.mas.gov.sg/~/media/resource/publications/staff_papers/StaffPaper36ReerMcDonald.pdfhttp://www.iie.com/publications/pb/pb07-4/macdonald.pdfhttp://www.diva-portal.org/smash/get/diva2:129240/FULLTEXT01.pdfhttp://www.diva-portal.org/smash/get/diva2:129240/FULLTEXT01.pdfhttp://papers.ssrn.com/sol3/papers.cfm?abstract_id=132508http://www.nber.org/papers/w5787http://research.stlouisfed.org/publications/review/90/01/LongRun_Jan_Feb1990.pdfhttp://www.nber.org/papers/w4952


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The Determination of the Real Exchange Rate in the Long-Run Evidence From UK

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Transcript of The Determination of the Real Exchange Rate in the Long-Run Evidence From UK