Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/102728
Authors: 
Binder, Michael
Offermanns, Christian J.
Year of Publication: 
2014
Series/Report no.: 
Discussion Paper, School of Business & Economics: Economics 2014/23
Abstract: 
We revisit medium- to long-run exchange rate determination, focusing on the role of international investment positions. To do so, we make use of a new econometric framework accounting for conditional long-run homogeneity in heterogeneous dynamic panel data models. In particular, in our model the long-run relationship between effective exchange rates and domestic as well as weighted foreign prices is a homogeneous function of a country's international investment position. We find rather strong support for purchasing power parity in environments of limited negative net foreign asset to GDP positions; furthermore, long-run exchange rate equilibria may have little relation to purchasing power parity outside such environments. We thus argue that the purchasing power parity hypothesis holds conditionally, but not unconditionally, and that international investment positions are an essential component to characterizing this conditionality.
Subjects: 
exchange rate determination
international financial integration
dynamic panel data models
JEL: 
F31
F37
C23
Document Type: 
Working Paper

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