HIGHLIGHTS
SUMMARY
As long as the exchange rate is close to PPP, the process is divergent with no tendency to return to PPP, and therefore, the exchange rate will spend most of the time close but unrelated to PPP. This view of real exchange rate behaviour may be too optimistic when the authors remember the history of the most traded rate, the Deutsche mark versus the the authors dollar, which motivated the authors to apply bubble models on exchange rates (see, for instance, ). This behaviour will lead to different characteristics of the real exchange rate: There . . .
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