The Long-Run U.S./U.K. Real Exchange Rate

Charles Engel, Chang-Jin Kim

Research output: Contribution to journalArticle

60 Citations (Scopus)

Abstract

The paper estimates a model for the real U.S./U.K. exchange rate. The Kalman filter is used to identify a permanent and a transitory component. We find the variance of the transitory component shifts among three states according to a Markov-switching process. The model is estimated by Gibbs sampling. The transitory component appears to be driven by temporary monetary phenomena. The shifts of variance occur at times of historically significant monetary events. We find the permanent component is cointegrated with relative per capital income levels, as in the Balassa-Samuelson hypothesis. The data support a model that contains a transitory component driven by monetary phenomena and a permanent component driven by relative income levels.

Original languageEnglish
Pages (from-to)335-356
Number of pages22
JournalJournal of Money, Credit and Banking
Volume31
Issue number3
Publication statusPublished - 1999 Aug 1

Fingerprint

Real exchange rate
Income level
Permanent component
Relative income
Balassa-Samuelson
Exchange rates
Markov switching
Gibbs sampling
Kalman filter

ASJC Scopus subject areas

  • Finance
  • Accounting
  • Economics and Econometrics

Cite this

The Long-Run U.S./U.K. Real Exchange Rate. / Engel, Charles; Kim, Chang-Jin.

In: Journal of Money, Credit and Banking, Vol. 31, No. 3, 01.08.1999, p. 335-356.

Research output: Contribution to journalArticle

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