TY  - JOUR
AU  - Engel,Charles
AU  - Kim,Chang-Jin
TI  - The Long-Run U.S./U.K. Real Exchange Rate
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 5777
PY  - 1996
Y2  - September 1996
UR  - http://www.nber.org/papers/w5777
L1  - http://www.nber.org/papers/w5777.pdf
N1  - Author contact info:
Charles Engel
Department of Economics
University of Wisconsin
1180 Observatory Drive
Madison, WI  53706-1393
Tel: 608/262-3697
Fax: 608/262-2033
E-Mail: cengel@ssc.wisc.edu

Chang-Jin Kim
Dept. of Economics
University of Washington
Seattle, WA 98105
E-Mail: changjin@u.washington.edu
AB  - We investigate the behavior of the long-run U.S./U.K. real exchange rate from 1885 to 1995.  Our long-run real exchange rate series is derived from an unobserved components model which divides the real exchange rate into permanent and transitory components.  The transitory component is modeled as having variances which switch, according to a Markov-switching process, among low, medium and high variance states.  The underlying assumptions of our time-series model are based on an economic theory in which the permanent component represents real influences, while the transitory component represents primarily short-run movements due to nominal exchange rate fluctuations. Because the model is difficult to estimate by standard methods, we describe how the method of Gibbs sampling can handle this model.  We find that our long-run real exchange rate series moves similarly to other measures proposed in the literature based on economic models.
ER  -