REAL EXCHANGE RATES OVER A CENTURY: THE CASE OF THE
DRACHMA/STERLING RATE, 1833-1939
Bank of Greece and University of Ioannina
Recent studies on real exchange rates advocate the use of long samples in order to reveal the low frequency properties of the processes. The present paper contributes to this strand of the literature by exploiting recently released time series for the drachma/sterling rate for the period 1833-1939. This is an interesting period as it covers different exchange rate regimes and the effects of important historical events. In the paper, the mean-reverting behaviour of the real drachma/sterling exchange rate is initially examined applying univariate unit root tests and then the validity of Purchasing Power Parity (PPP) is tested using cointegration analysis. The results provide support for a weak PPP relationship, which turns out to be robust across different sub-periods characterised by different exchange rate regimes. Adjustment to PPP is reached at a relatively high speed and occurs via movements of the nominal exchange rate.
JEL classification: F31; C32; N23; N24.
Keywords: real exchange rates; cointegration; PPP.
Acknowledgements: Comments from Heather Gibson are gratefully acknowledged. All remaining errors are entirely my responsibility. The views expressed in this paper are the author’s own and do not necessarily represent those of the institutions to which he is affiliated.
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