NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Chang-Jin Kim

Dept. of Economics
University of Washington
Seattle, WA 98105
Department of Economics
Korea University
Seoul, Korea

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NBER Working Papers and Publications

September 1996The Long-Run U.S./U.K. Real Exchange Rate
with Charles Engel: w5777
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 ...

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