Real exchange rates over the past two centuries: how important is the Harrode BalassaeSamuelson effect? Unpublished working paper, Fordham and Warwick Universities

equilibrium real exchange rate (the Harrod-Balassa-Samuelson, HBS effect) in an explicitly non-linear framework and allowing for shifts in real exchange rate volatility across nominal regimes. A statistically significant HBS effect for sterling–dollar captures its long-run trend and explains a proportion of variation in changes in the real rate that is proportional to the time horizon of the change. There is significant evidence of nonlinear reversion towards long-run equilibrium and downwards shifts in volatility during fixed nominal exchange rate regimes. In this article, we investigate the influence of productivity differentials on the equi-librium level of the real exchange rate and the speed at which the real exchange rate converges towards that equilibrium. Given that the real exchange rate is defined as the ratio of national prices expressed in a common currency, evidence of a long-run stable mean for the real exchange rate is a necessary condition for long-run purchasing power parity (PPP) to hold. The issue of whether or not the real exchange rate between major economies tends to revert towards a stable long-run equilibrium has been a topic of considerable debate in the literature (Taylor and Taylor, 2004).1 Taylor et al. (2001) argue that the key both t