SFB 303 Discussion Paper No. B-218

Author: Schmidt, Roland
Title: On the Stationarity of the Real Exchange Rate and the Role of Transaction Costs
Abstract: This paper investigates the real exchange rate between the German mark and the dollar for stationarity. The different tests we apply show conflicting evidence. The puzzle we resolve by introducing transaction costs that impose a range of real exchange rates to be compatible with purchasing power parity. This interpretation is finally successfully tested within an error correction model.
Creation-Date: August 1992
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