Scandinavian Working Papers in Economics

Memorandum,
Oslo University, Department of Economics

No 23/2002: Fundamental determinants of the long run real exchange rate: The case of Norway

Hilde C. Bjørnland and Håvard Hungnes ()
Additional contact information
Hilde C. Bjørnland: Dept. of Economics, University of Oslo, Postal: Department of Economics, University of Oslo, P.O Box 1095 Blindern, N-0317 Oslo, Norway
Håvard Hungnes: Statistics Norway, Research Department, Postal: P.O.D. 8131 Dep. , N-0033 Oslo , Norway ,

Abstract: Modelling the Norwegian exchange rate against a basket of currencies, we find a robust long-term link between the real exchange rate and real interest differential that is consistent with purchasing power parity (PPP) and uncovered interest parity (UIP). However, PPP alone is rejected. These findings are confirmed focusing on the Norwegian bilateral exchange rate with Germany and (possibly) Sweden, but rejected against the UK and the US. We argue that rejection of bilateral relationships may result from idiosyncratic shocks in the different countries that may be negligible when modelling against a basket of currencies.

Keywords: Purchasing power parity; uncovered interest parity; cointegration VAR

JEL-codes: C32; F31

38 pages, June 18, 2003

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