The Long Swings Puzzle: What the Data Tell When Allowed to Speak Freely

Abstract

The persistent movements away from long-run benchmark values in real exchange rates often observed in periods of currency ‡oat have been subject to much empirical research without resolving the underlying theoretical puzzle. This chapter demonstrates how the Cointegrated VAR approach of grouping together components of similar persistence can be used to uncover structures in the data that ultimately may help to explain theoretically the forces underlying such puzzling movements. The charaterization of the data into components which are empirically I(0), I(1) and I(2) is shown to be a powerful organizing principle, allowing us to structure the data into long-run, medium-run, and short-run behavior. Its main advantage is the ability to associate persistent movements away from fundamental benchmark values in one variable/relation with similar persistent movements somewhere else in the economy.JEL: C32, C50, F41

Using a Theory-Consistent CVAR Scenario to Test an Exchange Rate Model Based on Imperfect Knowledge

“…It also suggests that the long swings in the real exchange rate and the real interest rate differential are related. Juselius (2009) shows empirically that it is not possible to control for the persistence in the real exchange rate without bringing the interest rates into the analysis.…”

The Balassa–Samuelson Hypothesis in Developed Countries and Emerging Market Economies: Different Outcomes Explained

“…It seems reasonable to borrow the findings and arguments of Frydman et al (2008) and Juselius (2008) to account for the forces that feed the long swings of the nominal exchange rates in Figure 4. However, since we work with tradable prices, instead of consumer prices, we need some complementary factors to explain why RER(T) is not stationary -the PPP puzzle in the tradable sectors.…”

“…Juselius (2008) analysed the PPP puzzle in the German mark/US exchange rate by grouping together components of similar persistence in the frame of a Cointegrated VAR approach, and found, indeed, that the German CPI and the nominal exchange rate, respond very slowly to shocks.…”

The cointegrated vector autoregressive model with general deterministic terms

“…We de…ne the extended model based on the results in the previous subsection and the coe¢ cients in (14). We note in particular that 0 is proportional to , and de…ne the parameter 0 = 0 0 = 0 0 0 = 0 0 , such that the extended model is, see also (13),…”