Mean reversion in real exchange rates: evidence and implications for forecasting

Philippe Jorion · Richard J. Sweeney

185 citations0/0 files storedJournal of International Money and Finance

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Abstract

The stationarity of real exchange rates over the recent flexible exchange rate period is an issue that has long bedeviled researchers in international finance. Using a constrained multivariate framework, this paper provides the strongest evidence yet that real exchange rates were mean-reverting over the 1973-93 period. We also investigate shifts in long-run real exchange rates, which may be important for the purpose of forecasting. Out-of-sample forecasting shows that the random walk model is outperformed by a mean-stationary model, especially at long horizons. In addition, there are substantial forecasting benefits from using a multivariate approach.

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References

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2001The Choice of Numeraire Currency in Panel Tests of Purchasing Power Parity 1997Real exchange rate behavior 1997The Behaviour of Real Exchange Rates During the Post-Bretton Woods Period 2002The great appreciation, the great depreciation, and the purchasing power parity hypothesis 1996Relative Labor Productivity and the Real Exchange Rate in the Long Run: Evidence for a Panel of OECD Countries

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