ON EXCHANGE-RATES, NOMINAL AND REAL

The paper first develops an Australian 'commodity currency' exchange r ate model, which is extended to deal with real exchange rates as well. The nominal and real exchange-rate versions are then tested on Swiss data for the post-Bretton Woods period. While the model tracks the Swi ss franc nominal exchange rate vis-a-vis the dollar and the major Euro pean currencies very well, Swiss PPP real exchange rates are found to be heavily contaminated with measurement error. As that error explains the large co-movements in nominal and PPP real exchange rates, those co-movements are largely irrelevant to the PPP debate. (C) 1998 Elsevi er Science Ltd. All rights reserved.