Real Exchange Rates in the Long and Whort Run: A Panel Co-Integration Approach

Abstract

The main goal of this paper is to tackle the empirical issues of the real exchange rate literature by applying recently developed panel cointe-gration techniques to a structural long-run real exchange rate equation. Using annual data for 67 countries over 1966-97, we find evidence of cointegration between the real exchange rate and its fundamentals. I also find: (a) evidence of cointegration holds for all sub-samples of countries (classified by income or capital controls), (b) parameter cons-tancy across units holds only for high income countries and low capital controls, (c) structural change in the cointegrating relationship around 1973, (d) estimated parameters consistent with theoretical values im-plied with calibrated parameters of preferences and technology, (e) deviations from the equilibrium are large and persistent with half-life (between 2.8 and 5) consistent with the consensus interval of 2.5-5 found in the literature (Murray and Papell, 2002).