Co-movements in international dollar price levels

Shelley, Gary and Wallace, Frederick (2007): Co-movements in international dollar price levels.

Abstract

This paper studies the relation between movements in the U.S. price level and the dollar price levels of nineteen other countries. Using the band pass filter developed by Christiano and Fitzgerald (2003), we examine correlations between dollar prices when decomposed into their high, medium, and low frequency cycles. The low frequency cycle in the U.S. price series is highly correlated with low frequency cycles in dollar price levels of the majority of countries in our sample. The high correlation between low frequency cycles persists over a variety of historical sub-periods, including the eras of fixed and flexible nominal exchange rates. This result, suggesting the existence of a common long-run price cycle, is consistent with long-run purchasing power parity. In contrast, both high and medium frequency cycles are more highly correlated prior to the Great Depression. This result is consistent with studies finding greater stability of real exchange rates during the era of the gold standard. Also, it appears that the increased volatility of U.S. real exchange rates after the 1973 move to flexible exchange rates was largely due to declines in the co-movement of short-run dollar price cycles.

• Item Type: MPRA Paper
• Institution: Universidad de Quintana Roo
• Language: English
• Keywords: Purchasing power parity; real exchange rate volatility; band-pass filter
• Subjects: F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation

References

Alba, J., and Papell, D., 2007, Purchasing power parity and country characteristics: evidence from panel data tests, Journal of Development Economics, 83, 240-251.

Arize, A, 1998, The long-run relationship between import flows and real exchange rate volatility: the experience of eight European economies, International Review of Economics and Finance, 7(4), 417-435.

Arize, A., Osang, T., and Slottje, D., 2007, forthcoming, Exchange rate volatility in Latin America and its impact on foreign trade, International Review of Economics and Finance

Baxter, M., and King, R., 1999, Measuring business cycles: approximate band-pass filters for economic time series, Review of Economics and Statistics, 81, 575-593.

Chernyshoff, N., Jacks, D., and Taylor, A., 2005, Stuck on gold: real exchange rate volatility and the rise and fall of the gold standard, NBER working paper #11795.

Christiano, J., and Fitzgerald, T., (2003), The Band Pass Filter, International Economic Review 44(2), 435-465.

Devereux, M., and Engel, C., 2007, forthcoming, Expenditure switching versus real exchange rate stabilization: competing objectives for exchange rate policy, Journal of Monetary Economics

Diebold, F.X., Husted, S. and Rush, M., 1991, Real exchange rates under the gold standard, Journal of Political Economy 99(6), 1252-1271.

Gonzaga, G., and Terra, M., 1997, Equilibrium real exchange rate, volatility, and stabilization, Journal of Development Economics, 54, 77-100.

Grilli, V., and Kaminsky, G., 1991, Nominal exchange rate regimes and the real exchange rate, Journal of Monetary Economics 27, 191-212.

Everts, M., 2006, Band-pass filters, unpublished working paper, Munich Personal RePEc Archive, paper #2049.

Hausmann, R., Panizza, U., and Rigobon, R., 2006, The long-run volatility puzzle of the real exchange rate, Journal of International Money and Finance, 25, 93-124.

Hodrick, R., and Prescott, E., 1997, Postwar business cycles: an empirical investigation, Journal of Money, Credit, and Banking, 29, 1-16.

Kool, C.J.M., and Koedijk, K.G., 1997, Real exchange rates between the wars, Journal of International Money and Finance 16(2), 211-232.

Lee, K., and Ni, S., 1997, An empirical analysis of the output effects of temporary and persistent government purchases, Journal of Macroeconomics, 19(4), 717-730.

Lothian, J., 1998, Some stylized facts of floating exchange rates, Journal of International Money and Finance, 17, 29-39.

Mussa, M., 1986, Nominal exchange rate regimes and the behavior of real exchange rates: evidence and implications, in: Karl Brunner and Allan Meltzer, eds., Real business cycles, real exchange rates, and actual policies, Carnegie-Rochester Conference Series on Public Policy (North-Holland, Amsterdam).

Neumann, M., 1995, Real effects of exchange rate volatility, Journal of International Money and Finance, 14(3), 417-426.

Norrbin, S., and Pipatchaipoom, O., 2007, Is the real dollar rate highly volatile?, Economics Bulletin, 6(2), 1-15.

Robertson, R., 2004, Relative prices and wage inequality: evidence from Mexico, Journal of International Economics, 64, 387-409.

Sarno, L. and Taylor M.P., 2002. The Economics of Exchange Rates. Cambridge University Press, Cambridge.

Taylor, A., 2002, A century of purchasing power parity, Review of Economics and Statistics 84(1), 139-150.

Valdovinos, C., 2003, Inflation and economic growth in the long run, Economics Letters, 80 (2), 167-173.

Wallace, F. and Shelley, G., 2006, An alternative test of purchasing power parity, Economics Letters 92, 177-183.