DOES THE REAL EXCHANGE-RATE FOLLOW A RANDOM-WALK - THE PACIFIC BASIN PERSPECTIVE

In this paper we present evidence that dispels the view that PPP has b roken down during the 1970s and 1980s. Evidence from unit root tests o f the real exchange rate indicate that PPP held as a long-run equilibr ium condition for eight Pacific Basin countries over the period 1974 t o 1987. In contrast, we find the nominal exchange rates to be non-stat ionary. Additional evidence, however, shows that strong trend componen ts bind the nominal exchange rates of that set of countries together.