Deviations of exchange rates from purchasing power parity: A story featuring two monetary unions

We examine the mean-reverting properties of real exchange rates, by compari ng the unit root properties of a group of international real exchange rates with two groups of international real exchange rates. Strikingly, we find that while the international real rates taken as a group appear mean revert ing, the intranational rates are not. This is consistent with the view that while nominal shocks mag be mean reverting over the medium term, underlyin g real factors do generate long-term trends in real exchange rates. [JEL C1 2, C23, F31].